Seeking advice on a development opportunity

9 Replies

I have been in the real estate game for 10+ years as an investor/agent/management and have recently been approached to be a partner in developing about 100 acres into a residential neighborhood and starting a development company. I've never been one to shy away from a challenge and am very interested in doing this, but I am admittedly very green in this area of the business. If anyone has good advice, tips, first steps, experience doing this or any great resources I can turn to, it would be much appreciated. Thanks in advance!

@Dave Kansagor Learn their market strategy and see if it matches the market demand. So many project start off wrong based on a variety of factors. You need to be able to buy the land, put in site improvements, carry soft costs and make 30%-50% a profit margin. PM me if have additional questions. There are a lot of moving parts to these deals, they are fun! Brett

Hey guys, I have a quick question. I am a new investor who is looking at a possible development deal, something I have never done before. I want to be able to know the whole process and package the deal up so I can take it to my investor to fund. What I have no idea about is how much it will cost me to construct my whole project from start to finish including permits, plans, tax, fee's, etc. The deal costs $1.5 million for 3 adjacent homes with a total lot of 49,000 sqft (R3 zoning). I checked for comps in the area and the neighbor had a 23 unit apartment building that he sold for 4.7 million. The property was on a 23,000 sqft lot. His NOI was $215,516. He was charging $1,495 for each 2 bed/ 1 bath units. If my math is correct his complex has a 4.5 Cap Rate. I did some research on apartment buildings and found out that the value is determined by the cap rate. So based on his property and one more across the street with a 4.3 cap rate I should be able to build at least 46 units? And since it will be a newer constructed complex we should be able to get around $1,750 per 2/1 unit. So 1,750x46=80,500x12= 966K GROSS. I have no idea how much expenses would be so I'm using 375K as a random number which comes out to 591K. If I decide to hold the property and get it appraised in a year or two will it be valued at 14.0 million with a 4.2 Cap Rate?

@Dave Kansagor What role have you been asked to add to the company.  There are many different roles within a development company.  100 acres is a very large development.  The first one I worked on was 50 acres and 400 units - 6 years of work.

@Kirt Sangha   4.5% cap in MF right now is very aggressive with little margin for error, especially for a new investor who has not done a develop before.  With respect to cost, what type of development are you considering.  SF, MF, number of stories, parking etc.

Originally posted by @Scott Krone :

@Dave Kansagor What role have you been asked to add to the company.  There are many different roles within a development company.  100 acres is a very large development.  The first one I worked on was 50 acres and 400 units - 6 years of work.

@Kirt Sangha  4.5% cap in MF right now is very aggressive with little margin for error, especially for a new investor who has not done a develop before.  With respect to cost, what type of development are you considering.  SF, MF, number of stories, parking etc.

I'm located in Orange County, CA, I plan on building MF 2-3 stories. The complex next door is also two stories with 23 units on half the lot. Sold for $4.7 with an NOI of $215,516// EXPENSES: $133,883// GROSS: $349,399. Total lot 24,394 sqft and 15,873 sqft building. Another Property sold across the street for $2.325. 11 units// 7,567 sqft building// 19,602 sqft lot// NOI: $107,012// EXPENSES: $47,788// GROSS: $154,800.

@Brett Dawson  market strategy matches current market demand as well as demand for the foreseeable future based on population growth factors including economic development and redevelopment in the area. I will PM you with other questions as the "moving parts" as you put it, is what I need to dig into and be made aware of. Thanks.

@Scott Krone I have been asked to be a principal in this new company along with 2 others. What type of development was that first project of 400 units occupying 50 acres? What were your first, most important steps? Key metrics in due diligence? Knowing what you know now about community development, if you could go back, what would you tell yourself when you first started and do differently?

@Dave Kansagor   It was the former SaraLee factory, which was demolished.  The new development was 316 condos, 64 townhomes, 16 single family, underground parking, club house, water retention, and all of the streets, landscaping etc.  My role was two parts.  I worked on the overall plan for the community, and the unit layouts.  Once that was done, I also worked on the financial modeling of the development.  

The first steps for any development is understanding the market - what demands there are for the proposed product, current supply/inventory, what the community will accept with respect to zoning.  We initially proposed 1,000 condos, and the city boards approved 400 total units of condos/townhomes and homes.  Lots of risk on a 6 - 8 year plan.   Markets conditions can change during that time.  What I learned was how to negotiate and know your out position.  When I worked on it, I did not have an appreciation for the market conditions.  From my perspective, it was more of a Field of Dreams mentality, "If you build it they will come."  I am not saying that was the developers position, that was my limited understanding at that time.  That being said, I do see a lot of "newer" investors have the Field of Dreams mentality.  Today, we don't buy without having a full knowledge of the market.  We hire third party consultants to advise us of the markets.  We spend a good amount of money annually on those studies.

@Scott Krone Current demand in the market will not support this development. However, in the next few years, the businesses that have committed to relocating to the area, one of which is a major employer of 10,000+) will more than support our vision. Like you, my role is developing the overall plan and vision for the community. What the current community and local govt board will accept and allow will obviously dictate how and what we proceed with. We are going to be careful and calculated with what we do and certainly won't adopt the Field of Dreams mentality. Although, if we build it, it'd be nice if people came and bought it! What tools did you use and how did you plan out your timeline of 6-8 years and how accurate was your financial modeling of the development versus actual cost/profit?

@Dave Kansagor   @Scott Krone is right; 100 acres is a very large site.  From a construction standpoint it is very important to understand the features and limitations of your site before getting too far down the rabbit hole.  Site work is often the most expensive and weather dependent phase of a construction project and its important to have a talented and creative civil engineer as well as a earthwork contractor big enough to handle the scope of work in a timely manor.  If possible I would have your plans and site evaluated by your general contractor, excavator, and a creative consultant who has been involved with projects like these for many years and is familiar with the challenges.  

How far along is your planning?  Have you talked with design professionals or general contractors yet?