I am new to the game of developing. By new, I mean I have never developed a property in my life! I am wondering what the best way to get financing for my first project would be.
I currently own the land that I would like to develop on. It is a hard corner in a densely populated city. The city will approve a mixed-use scenario with retail on the ground level and apartments above. I have the highest zoning in the city so my options are pretty endless except for industrial.
Options I have thought of:
1. Partnering with a local bank
2. Obtaining LOIs from National/International tenants
3. Bringing on partners
4. Any other ideas? If I wanted to go with choice #1 what would be the most effective way of convincing a bank that I have a solid project?
Thank you for any advice.
Oh, one more question: I have the possibility between building a Starbucks and another successful coffeeshop. Is it better to go with the international tenant or the other coffeeshop? What would make someone choose one over the other?
That is a great problem to have. Deciding what to do with a Mixed Use lot is always a bit of speculation. Do you have the option to get a Starbucks lease now? That would be pretty compelling if they would be willing to sign a lease for a building that isn't built yet. They are likely to have a set of requirements for the space.
You will need a project plan including architects, city permitting, utilities (water, waste water, electrical), possibly environmental studies depending on your municipality. Finding a good builder that has done this before is more critical than a bank. If you have enough equity in the project you may be able to get a commercial loan assuming the development team knows the ropes.
Since you've never done one before. I would highly recommend hiring a commercial builder and architect. You will need to do some feasibility studies as well to see what can fit. Then get ready for the permitting process which depends on your area. That can be 1-18 months, it's really all over the place.
Development can be a lot of fun, because there are a lot of problems to solve. Find a good developer and hire them. Once you watch the project move forward, you can decide which parts you may want to do yourself next time. Without experience, you can step on some very expensive land mines.
Best of luck,
@John Blackman Thank you for the response! How can I find a reputable builder and architect that won't overcharge me because I am new? It seems like such a large project with moving parts, like you said, that it would be easy for them to take advantage of me. I know when I see a deal, hence me buying the land, but I am not savvy when it comes to finding dependable companies in such a non-transparent business. Thank you! If it helps, the project is in SoCal.
Hi David, congrats on the site, it sounds like a great project. In regards to finding an architect, I would recommend researching and selecting a few that are experienced in similar projects and you like their style. Bonus points if they are local, as they will be able to work through the permitting process more easily than someone that has not worked in your area. Narrow it down to a few and meet with them, bring a list of questions, and there is no reason that they would overcharge you or not take you seriously. Let them know you are looking at several options (same for when you are looking at builders) and this will help you get the best price.
Thank you @Colin L. I will have to start compiling a list and just go for it!
Unfortunately there is no way to guarantee anything. In our development business we have been through 8 builders to get to 3. Those 5 that didn't work out cost anywhere from $25,000 to $50,000 each in mistakes or bad management. For a project like yours the numbers are going to be higher. So you will have to vet your builders very carefully.
Get several bids. Make sure the builders have a long track record. You are not going to get a 'deal.' In fact you may end up paying more. You are likely to make many mistakes which will cost you. Hopefully you can absorb them in your anticipated margin, but such is learning a new business. You are jumping into high stakes development on your first project which is risky. The rewards could also be very high. If you want to try builders out on smaller projects, that would minimize your risk but it will take time.
It takes us about a year to fully vet a builder on a new project. We're 5 years in and still just have a few trusted providers. Others may be able to do this faster or get lucky, but unfortunately there is no way to know until you try them out. Everyone talks a good talk, but performing is entirely different.
Is it possible that you partner with a builder. You already have your end of the deal. Just need a builder. Talk with a few and get numbers from a few on the same building and then you can try to compare apples to apples as much as possible. Plus then you can valuate who is bringing what to the table.
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