Even if it’s not your first, the feasibility analysis portion of a build to suit development still may be more complex than you think. Let’s break it down beginning with the basics, and then dive into the details.
Feasibility studies in real estate development are preliminary measures taken to determine viability during the early stages of a potential project. Its main purpose is to identify potential issues that could occur if a project is pursued.
Another reason to conduct a thorough feasibility analysis is that it assists in obtaining the necessary documentation for municipality submittals such as site plans, grading/drainage plans, and the project management plan. It is important to note that the majority of commercial lenders will require Environmental Site Assessment (at least Phase I) and Geotechnical reports before approving a loan.
Here are the main components that make up a build to suit real estate feasibility study — plus a more in-depth look at how to maximize its effectiveness.
Detailed Property Description
A detailed depiction of the property is obvious, but do you have all the bases covered? This includes the parcel number(s); number of parking stalls and positioning, including handicapped spots; concept plan; land survey; and aerial map.
Then, you need to take it a step further and take into account the impact on the environment and surrounding businesses; municipal incentives; competitive market and neighborhood analysis; and zoning. One tip you don’t want to overlook is checking for any adjacent property owner issues and existing violations.
If you are self-developing the property, you should be aware of the parts of an extensive field investigation. This includes, but is not limited to, the geotechnical investigation report; laboratory testing; site geology; earthwork; and the summary of subsurface and groundwater conditions.
Another item to examine during the feasibility analysis is what the probable project timeline would look like. A greatly influencing variable would be the entitlement schedule, which would encompass the timeline of the municipalities, meetings and hearings, submittals, and obtaining permits to begin construction.
Pulling a summary of the main issues could also reveal items that could threaten the timeline. Such examples would be related to traffic (i.e. needing to install a turn-in lane); parking variances; replatting; zoning issues; and utilities (i.e. access, grading, hydrology, erosion, and septic).
The aforementioned Phase I, geotechnical report, and ALTA surveys are the most critical environmental studies needed for every commercial development. It is recommended that you allot a time frame of at least two months.
Of course, no development feasibility study would be complete without economic confirmation. And in a development feasibility study, it is even more in-depth than a business plan’s cost-benefit analysis. If you partner with a professional developer, they are responsible for determining the prospective property’s economic feasibility, as well as assume the risk of the land purchase, and cover the construction costs — all while keeping your rent at your agreed upon rate.
This is due to the fact that the developer uses educated assumptions when project costs are input. This could mean using previous projects to estimate construction costs, lender terms, consultant costs, and other fees. If you choose to not work with a developer, you will need to determine whether the proposed amount of capital and financing will be sufficient.
An example of a potentially detrimental finding that can quickly become costly is a required site improvement. For instance, it could be related to sanitary sewer, water, electrical, telephone, high-speed internet, or water treatment. You will need to take this into account when calculating the economic feasibility.
As stated, feasibility studies are vital in commercial development as they will determine the viability of your next property. No matter how large or small the project, remember these components and tips for efficiency in your analysis. Or, consider hiring a preferred developer to get the job done according to your unique vision.