The profitability of any development project is subject to many factors throughout the process; the most important one, though, is having a clear understanding of how you want this profit to come.
For this, we need to answer the following questions before the start of a development project: Is this an income property that will deliver a rental income month after month? Or is this a property that we are looking to flip back in the market place?
In this fifth installment of our development yield optimization series, we touch on four critical points to ensure the profitability of commercial developments in the North Gulf Coast region. If you’re just joining us now, you may find the previous articles of use as well.
Follow the shortcuts:
1. Adequately define your development vision
A successful development begins by establishing clear project goals and objectives, and confirming their feasibility from a budget, schedule, site and operations perspective. These goals and objectives include the project’s uses, functions, performance criteria, aesthetics, space and expandability requirements.
The key here is asking yourself four important questions:
Purpose – what is the purpose of the building project?
Use – is the land suitable for your plans?
Cost – does your budget cover the cost of the land, building, legal and survey costs, plus a contingency for the unforeseen?
Re-sale – will your project realize a profit?
2. Match the site to your development project
The location, dimensions and condition of the development site, as well as the design of the building and individual units, will have a significant impact on the costs of construction and operation. These factors also can influence livability and marketability, ultimately determining the profit potential of your project.
The shape, slope and soil conditions of a piece of property will all have an impact on the practicality of development. An odd-shaped lot may present design challenges and the cost to remediate a polluted site will have a serious impact on project viability. The availability of services to a site is another important consideration, as it is expensive to bring or upgrade water, sewer, power and other utilities, as well as roads and sidewalks, to a piece of property.
Last but not least, it is vitally important to understand what a property can be used for, and what the highest and best use of the land is. Once you know the zoning categories (e.g. residential, mixed-use, commercial), you will know what type of property is allowed under each of these particular zoning categories.
By understanding the most ideal use of the property – you can quickly determine whether it will fit your needs – or the needs of those you intend to market the property to.
3. Create a roadmap to critical development milestones
This is your complete plan, from the first handshake to the Certificate of Occupancy, and in the process, you will be able to tighten up any loose points.
Using all of the information that you have gathered up to now, you should have a timeline and price of the finished product, a list of milestones to guide you along your way, and a calendar of all of the activities leading to development approval and beyond. Any changes in plan or development of otherwise unusable land can be added to this plan in order to make the most out of what you’ve got.
4. Optimize development yield
Clearly stating what sort of return you would like for your investment means the world to your project. For example, if you have acquired a lot at a good price and would like to flip a property as fast as possible, worrying about a renter’s lifespan is not as pressing an issue.
On the other hand, if you’re raising a multi-family complex with retail space on the first floor, knowing the demographics of an area and what to expect of potential renters will make the difference between a profitable income project or a deficit in your assets. In other words, you must know what sort of yield you want in relation to your vision.