Commercial Real Estate Development 101
Commercial real estate development is about turning a vision into real commercial property. The process can be detailed and tedious but when handled successfully, a product is delivered that meets a consumer demand and drives a profit.
Real estate development requires the expertise and participation of a wide variety of professionals, including building and landscape architects, civil engineers, site planners, lawyers, surveyors, lenders, title companies, environmental consultants, and contractors. In this article you will learn the basics of commercial real estate development 101.
Commercial Real Estate Development 101
The commercial real estate development process can be broken out into five key stages:
- Site-selection and deal making
- Development and entitlement
- Inspections and construction close-out
- Tenant move-in
Site selection and deal making
The first phase of commercial real estate development is all about choosing a site and deal making to get the approval to make it happen. It involves research and analysis to determine if a proposed development is viable. For example, a successful retail site must meet market demand, satisfy tenant requirements, and meet all lending conditions and regulatory requirements.
Factors such as construction costs, utility connection fees, impact fees, property size, zoning restrictions, and visibility are taken into account during the site selection and evaluation process. This is followed by a phase of due diligence and research to identify the risks and advantages of the transaction and to ensure that all legal requirements are satisfied. Questions such as what kind of requirements are needed in order to develop the property? should be answered during this phase, generally by contacting municipal planning departments.
Once viability is established, you are ready to create a site plan. A commercial site plan is a detailed, true-to-scale drawing of the property that includes dimensions, current permanent structures and elements, and any proposed additions or modifications for your intended usage. Any potential issues with the site such as parking setbacks should be identified.
In addition to information about the property itself, commercial site plans also require information about:
- Surrounding streets
- Street signs and stop lights
- Easements such as utility easements and sewer lines
- Fire hydrants
Next, you will need to provide municipality and lender required reports:
- Environmental study
- Geotechnical study
- Establish preliminary budgets (Pro forma analysis)
Once the site plan is created and due diligence research and reports are complete, the purchase contract can be signed. Now it’s time to move on to the development details.
Development and entitlement
The development and entitlement phase is about getting the sign-offs and approvals required from the municipality for your proposed commercial real estate development(s) to become a reality.
Architects, engineers, and consultants are hired during this phase to ensure the most workable development plans and processes will be put into place to give the best possible chance for a successful and under budget development project.
Community outreach and communications are also important during the development and entitlement phase so the surrounding community is kept informed of the proposed development plans, including its benefits and potential impacts. In addition to providing information, the goal is to listen to and consider the future neighbors’ concerns and to hopefully improve community sentiment about the project.
The following steps must also be completed:
- Municipality submittal and review
- City entitlement process for rezoning, road approvals, etc.
- City council or city planning commission approval
- Public hearing
- Pre-construction coordination to review construction bids
- Construction drawings/building plan submittal to the municipality who will review it for compliance
- Finalize budget
- Building permits approval/issuance
- Close of escrow
Getting a property fully approved, entitled, and closing on the land requires patience, diligence, and experience. Once the development plans have been submitted and approved, your permits have been issued, and you’ve closed on the property; it’s go-time for contractors and builders to begin construction on the commercial development.
The commercial real estate developer manages and coordinates the construction stage while the general contractors and sub-contractors handle the construction work. Management tasks include weekly construction calls and reports and handling RFIs (requests for information) from contractors and architects.
A pre-construction meeting is where the developer, contractors, architects, and other involved parties discuss the overall construction plan and expectations to ensure everyone is on the same page. Once the meeting is done, it’s time to mobilize construction crews, equipment, and materials to the site.
- Permits are pulled for the property
- Survey staking is completed to physically map the planned development out on the site
- Soil samples are taken
- Earthwork is handled
- The building’s pad/foundation is poured
Now it’s time for construction so the building can take structure. Steps include:
- Site utility work
- Interior work including, electrical, ductwork, insulation, drywall, flooring, doors and hardware, painting and fixtures
In addition to construction of the building, on-site work on the surrounding property must be completed, including:
- Site grading
- Paving and striping parking
Off-site work is also completed to support the new development including infrastructure for access to roads and sidewalks and other supplemental utility work.
Inspections & construction close-out
When construction is completed, inspections are required to ensure that the major elements meet all municipal codes and ordinances. While periodic inspections should be expected during the construction phase, final inspections are carried out on building components including the structural and building envelope, roof surface, plumbing, electrical, and HVAC to assure that the building is safe for occupancy.
The close-out process addresses everything from the work performed by contractors to returning of rented equipment. A construction punch list is also created to address any unresolved tasks or issues before final occupancy.
Once the project meets all of the final inspections, codes, and ordinances, the appropriate municipal agency will issue a Certificate of Occupancy for the property, which means the building is ready for occupancy by the proposed user or type of user and that the building complies with the plans and specifications that were initially submitted and approved.
The final step in the commercial real estate development process is tenant move-in. During this phase, the developer ensures that the property is prepared for the tenant to move into the space they will use to run their business.
*This article is meant to provide a basic summary or outline of the commercial real estate development process; it is not meant to be a comprehensive checklist.
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