A Guide to Real Estate Development
Real estate development is a complicated process aimed at creating value by improving raw or vacant land or real property. The process is typically managed by a real estate developer – someone who has the industry knowledge to identify opportunities and an extensive professional network to complete a project.
Real estate developers need to be expert project managers and people connectors. A typical project will involve professionals from various industries, including attorneys, environmental consultants, architects, engineers, land planners, surveyors, lenders, and contractors – so knowing who to enlist and when to leverage their expertise is vital to the overall success of a project.
A real estate development can be a lengthy undertaking and involves varying amounts of risk depending on the type of project. Projects can range from land speculation to existing property renovation to ground-up development.
The process can be overwhelming if not properly navigated. Mistakes made during development will not only add time to a project but are often very costly. And when you’ve borrowed money or are responsible for managing the interests of 3rd party stakeholders, the pressure intensifies.
Planning, following a sequential process, and establishing risk mitigation measures as part of every development project are essential for success.
Traditional development projects are typically broken down into distinct phases – and from a project management perspective, those phases help delineate significant project milestones. However depending on the type and nature of a proposed project, milestones may vary, and the associated benchmarks required during each phase will change.
Below, we discuss the 4 major stages of real estate development and several important tasks implicit in each phase.
Table of Contents
Phase 1 – Site Selection & Land Acquisition
A successful real estate development project begins with proper site selection. Site selection involves the process of finding a site, conducting preliminary due diligence, and determining its feasibility.
This development phase involves a substantial amount of research, analysis, and some speculation – you need to determine whether a site can accommodate your needs and whether development is viable.
Determine Project Scope and Goals
A retail build-to-suit is different from a speculative multifamily development. Each completed project required a unique process was built for a different end-user, and had project-specific objectives.
Backward planning offers a project management framework to assist in the site selection process. First, you need to determine your business/financial goals and desired project end state. Then you subsequently develop an action plan. Your action plan will dictate a set of requirements that will untimely inform the site selection and land acquisition process.
If you’re a small business or an operating company, a real estate strategy deep dive will be the place to start. However, before you undertake a development, it can help answer some important questions like:
- What are my 5, 10, and 20-year growth projections, and how do they impact my real estate decisions?
- What does my balance sheet say about my capital structure, and how does that impact my project?
- Given my operating margins, what kind of development arrangement makes sense?
- Does my top-line growth impact other variable business functions?
- Are my real estate and business strategies properly aligned?
- How do I best optimize my facility to support my operations?
Narrowing the project’s scope and arriving at your “goal” is important. But more importantly, the intellectual process of this planning and strategy assessment will establish a solid foundation for the rest of the real estate development process.
Preliminary Real Estate Due Diligence
Before you submit an offer to purchase a property, it’s important to examine the requirements involved in developing a property thoroughly. Unfortunately, most property owners won’t let you conduct formal, invasive due diligence investigations until you’re either under contract or have purchased an option on a site.
However public resources like tax records, geographic information system mapping, and a municipality’s development guidelines can offer important insights into a property and help with your preliminary due diligence efforts.
When you’re investigating a site, you’ll want to be able to answer a variety of questions:
- Does the current zoning support your proposed use?
- Is the site large enough to support your proposed building?
- Are there major topographical issues that would disrupt the project or add major costs to development (streams, wetlands, elevation changes, flood zones, etc.)?
- Does the property have access to utilities on-site? Or are they near the site?
- What are (or will be) the primary avenues of ingress and egress
- If you’re “forced” to close on a property, is there a viable exit plan?
- Traffic flow, visibility, and demographic statistics
It’s important to note that preliminary due diligence is not exhaustive. A more comprehensive analysis will be conducted as part of the pre-development of a site. However preliminary due diligence and research will help a developer assess a site’s initial risks and potential problems.
Feasibility Study
A development feasibility study is similar to a traditional business plan. It seeks to offer a roadmap for a potential project by assessing all site investigation, research, and preliminary due diligence items against potential problems and their financial implications.
The main purpose of a feasibility study is to provide a predictive analysis of the success of the overall project and the probability of various outcomes.
A feasibility study will also weigh competitor data, municipal-specific requirements, demographic trends, and macroeconomic implications – developers will have much more insight into a project’s potential snafus.
Preliminary Development Budget and Financial Analysis
A preliminary development budget will not be all-inclusive. Budgets conceived during the site selection phase of a project will be primarily based on historical data and educated conjecture, with some 3rd party estimates.
The budget and all associated development and project costs will then need to be rolled into a proforma to assess the financial implications.
All relevant cash flows (due diligence, acquisition, construction (both hard costs vs. soft costs), carrying costs, disposition, etc.) should be included – the financial analysis will estimate a project’s yield and, ultimately, the financial return a real estate developer should expect to see.
Major roadblocks discovered during the feasibility study must be incorporated into the budget and financial analysis to properly assess the profitability of a project.
Estimating construction costs during project design and pre-development is a major challenge. It’s important to work with a trusted contractor early in the design process to assist with compiling accurate cost estimates that can be used in budgeting to help make informed development decisions.
Evaluate Capital Markets & Development Financing
Financing a development project is different from applying for a residential or even a commercial mortgage. Because real estate development is inherently more speculative than an existing property acquisition, the terms and type of development financing are based on the proposed project and associated risks.
Cash, syndicated financing, crowdfunding, equity placements, joint ventures, bridge and mezzanine financing, hard money, and traditional funding – they’re all viable methods of financing a development project. In addition, small-scale developers and investors can even bridge funding gaps in the project’s capital stack through creative capital markets solutions – by offering opportunities to bring less sponsor capital to a project.
A developer’s experience and track record and an operator’s balance sheet will also be important factors when fundraising for a real estate development.
Purchase Contract Negotiation and Signature
Land contract negotiation can be a long and nuanced process. The purchase agreement needs to be comprehensive because, as a developer, you’ll need to afford yourself enough time to assess the property, navigate any municipal hurdles, and fully entitle the site.
Phase 2 – Pre-development
Once you’ve selected a site and you have control over the property, you can begin pre-development.
The pre-development phase focuses on the key details of the project – site plan and architectural work, municipal reviews and permitting, and ultimately land entitlement.
By the end of the pre-development phase, you’ll have all the approvals necessary to begin development and construction.
Site Evaluation
Site evaluation is an extension of the investigative work you did during preliminary due diligence. It involves evaluating and reporting on various physical and environmental aspects of a site that could impact a project.
There are several important evaluations to consider:
Survey
A property survey confirms a property’s legal description, boundaries, and any associated easements or other restrictions included with a site.
The survey report will often include a graphic depiction of the property, including all improvements and physical features of the site. The report will help to better understand the land and inform the developer whether the site is usable for the intended purposes.
Geotechnical Survey (Soil Study)
A geotechnical engineer conducts an assessment of the ground condition, which usually involves a soil study to determine the usability of the soil on the site.
The soil study will help answer several important development questions:
- Is the site suitable for development?
- Where should you locate the building on the site?
- What soils can support well or septic installation?
- How should the building’s footprint look?
Traffic Impact Analysis
A traffic impact analysis is a study that assesses how a proposed development will impact existing roadways and infrastructure.
Following the traffic impact study, recommendations and required mitigation measures will be offered. For example, depending on the size and impact of a development, it’s not uncommon for a project would require signalization or the dedication of right-of-way to install a turning lane.
Phase 1 Environmental Site Assessment (ESA)
A phase 1 environmental site assessment is an environmental inspection that assesses the historical and current use of a property and identifies any potential or existing environmental liabilities.
If contamination or adverse environmental conditions are identified, follow-on assessments may be required, or a project may no longer be feasible.
Off-Site Improvements
Off-site improvements are physical improvements to roads, public right-of-ways, treatment plants, and utilities. Because of the impact a new development has on its surrounding area, many projects require work outside of a property’s boundaries.
Off-site improvements can represent a major expense, and when they’re unanticipated, they can significantly impact a project’s feasibility.
Assemble Your Real Estate Development Team
Real estate development is a team sport. Therefore, assembling the right group of professionals and consultants, who have experience with the municipality can navigate applicable ordinances, and have participated in similar projects is crucial to the success of a development.
The consultants are experts in navigating their specific professional fields and will largely be responsible for the development and submission of plans and liaising with municipal authorities.
Civil Engineer
Civil engineers are experts in the planning and design of physical infrastructure based on the technical aspects of an associated piece of land.
The civil design of a site encompasses everything from topographical issues to sidewalk and landscape design, to stormwater collection and drainage considerations. Based on a civil engineer’s technical expertise and the characteristics of a site, a civil engineer will develop a site plan outlining the project’s proposed layout and design.
Architect
A properly designed building can help promote a company’s cultural values in addition to enabling more efficient operations. Conversely, poorly designed space can substantially detract from the overall effectiveness of a building.
Land Use Attorney
A land-use attorney is an expert in all legal matters about land, zoning laws, and municipal considerations related to construction.
They can be particularly helpful when trying to rezone a property, working through recombination or subdivision cases, or when trying to navigate convoluted municipal development regulations.
General Contractor
A general contractor is responsible for the management and oversight of a construction site. In addition, they coordinate with vendors, subcontractors, and other trades to ensure the timely construction of a property.
A well-connected general contractor will have relationships with construction material suppliers and ideally has experience constructing the type of proposed development. In addition, many states require contractors to obtain certain licenses depending on the size and scope of a project.
The general contractor will also be responsible for obtaining the requisite building and construction permits required for the development.
Site Plan & Construction Drawings
The bread and butter of real estate development is the site plan. A site plan is a geographic representation of the proposed improvements and development of a site.
A site plan should include:
- Buildings, parking lots, roads, and sidewalks
- Utilities
- Landscaping
- Property lines, setbacks, and easements
- Wetlands, floodways, and major topography
- Utility plans
- Stormwater plans
- Erosion control plans
- Site lighting plans
- Demolition plans
Construction drawings will help guide the general contractor and any subcontractor’s efforts for the land development and site construction
Land Entitlement Requirements
Land entitlement is the legal process of gaining the proper approvals for a development plan.
Because every real estate development involves a slightly different process, not every proposed project will require the approvals discussed below.
Land Subdivision and Recombination
Land recombination is the process of joining two or more individual lots of land into a new configuration for development.
Utility, Road and Landscape Approvals
Landscape approvals may also derail or delay a development project. Various municipal ordinances cover landscaping regulations, which need to be reviewed and approved by the applicable authorities.
Zoning Variances and Conditional Use Permits
Maybe your project doesn’t require a complete land rezoning. Still, you need a waiver to avoid requirements established under the zoning code – ordinances like minimum building size, height or number of stories, or setback requirements. A zoning variance would be required to deviate from those pre-established standards.
Most zoning ordinances allow for a specific set of uses, by right. A conditional use permit allows a developer to deviate from that set of uses without having to go through the entire land rezoning process.