When is it a smart development?

Question

Just a quick question...I have done many smaller developments, I'm looking at some bigger deals...But when is it a good development particularly the development of apartments?

Any insight from the board would be greatly appreciated.

Corey Williams · Answer

the "quick" answer is a good deal meets your goals and objectives for return on investment.  Everyone has a different idea or willingness to accept risk so to say there is one answer to your question is tough.

The long answer involves evaluating the site location, demographics, area jobs, college area, etc.  I'm sure that you understand you can't build the Taj Mahl in the hood but you do need to define the type of project you want to develop and where you want to build it and if they will come once it is built.

The company I work for is very conservative and sometimes I get frustrated when we pass on a project that I know would have made money.  Of course, it's easy for me to feel this way because it's not my money and they have been doing this since the early eighties and are very successful so it's hard to question their objectives.

Brian Levredge · Answer

It makes sense when rents can support the price of land acquisition and the costs of new construction (both soft and hard) and still give you a decent ROI.  Most markets are experiencing vacancy increases and falling rents right now.  Because of this, there is stiff competition for tenants since there are a lot of property owners offering some nice incentives.

Tod R. · Answer

A bigger project may mean a different investment arena.  Many A properties are held in larger portfolios by either  institutions or high wealth individuals.  Think about your exit strategy, and who would be  your targeted seller.  Learn what cap rate similar properties in the same market are selling for.  From our experience, we have had to justify the desirability of the market, quality of our product and sufficient cash flow to justify sales price.  All of which are basically similar to smaller developments.

Mark B · Answer

@ Tod R,
I noticed that you mentioned that after you develop the apartment complex, you look for a buyer.  Is that always the case for you, or do you ever just hold as an income property?  I'm interested in hearing your thought on this, specific to medium-sized apartment complexes (15-30 units).

The reason I ask is that I am at the very beginning stages of puting a devmt deal together.  I have the hard money lender, and I am tageting this type and size of project, but still wondering what the exit strategy is.

Thx,
M

When is it a smart development?

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