Understanding the Real Estate Development Process
Written by: Alan Nochumson
Real estate development is about taking ideas on paper and turning them into real property. It is a process that delivers a product in order to meet some form of consumer demand. The real estate development process is also intricate, as it involves participation from a wide variety of professionals, including architects, landscape architects, civil engineers, site planners, attorneys, environmental consultants, surveyors, title companies, lenders, architects, general contractors, and subcontractors, amongst a variety of others. Before making any decisions to invest in a real estate development project, it is important to understand how the entire development process works.
Below are 6 major steps in the real estate development process will allow you to be able to track the progress of your investment:
Using multiple sources of information, commercial real estate developers look at all available properties within a designated trade area that meet basic site requirements. Some of the most important factors that go into determining the right site are:
- Property size
- Traffic flow
- Zoning Restrictions
- Surrounding Infrastructure
- Potential Access Points
- Competitors (and their performance)
- Nearby tenants (and their sales data)
There are additionally a whole host of additional factors that play into finding the right property to fit the client’s needs.
Due Diligence and Feasibility
In this phase of the commercial real estate development process, steps are taken in order to satisfy legal requirements and ascertain the risks and advantages of the transaction. As a prospective buyer, real estate developers must thoroughly examine zoning restrictions, potentials liens, and possible encroachments on the property. The real estate developer must ask themselves if the assumptions about the proposed development (legal, physical, economic, market) are valid or have been verified. Once you have adequate information and have a specific site selected, that is when you really dive into the process. Working with the city planner, you will establish that for a specific site, the plan to build for a specific user. This will give the city an idea of what your general development plans are.
In simple terms, entitlements mean that you get approval from all necessary parties in order to be able to develop and construct what you are wanting to develop and construct on the property. Usually, this means getting approval from the city you are developing in, state departments as necessary, and other vested parties who the real estate developer requires authorization from. Entitlements can be as simple as checking with the city that you are allowed to build what you are trying to develop, to complex enough to warrant getting an attorney involved to walk the project through the process. With extremely large projects, this phase can take years before entitlements are received.
The design consists of getting all of the drawings and plans done so that the project can begin construction. This mostly consists of working with the architect, engineers, and other project consultants to bring your project to life (on paper). While this seems like a simple step in the process, depending on the project, this phase is oftentimes one of the most time-consuming.
Usually, real estate developers do not have all the money on hand to develop and construct their projects. This is the most typical stage where equity investors and lenders are brought into the deal. Real estate developers are expected to take on most of the risk and rightfully so because that is why they get paid a developer fee. Equity investors are necessary for commercial real estate deals because lenders will only lend up to a certain percentage of the total project cost. Think of it as a down payment on a home. Because of this need for equity investors, real estate developers often give up huge portions of ownership in their projects to equity investors.
Lenders are also an essential piece of the financing puzzle and lenders should be carefully selected by the real estate development team. Not all lenders are created equal and it is important to use the right lender in the right situation.
Some real estate developers think that they are done when the project gets to construction, but that is how you can tell an experienced developer for a novice. Experienced real estate developers will never just turn over the reins to a construction company to build the project. The real estate developer should be communicated with the general contractor frequently and regularly. Construction can be very tricky and there is a lot of mistakes that can be made at this stage. Experienced real estate developers have the foresight to see problems coming down the pipeline and solve them before they become huge delays and money pits.
If you are working with any contractor for your real estate development projects, it is also important to check certain boxes during your search for one so you can protect yourself from potential pitfalls. One of our attorneys, Natalie Klyashtorny, recently discussed some crucial steps in finding a contractor. You can read more about it here.
If you’re considering investing in a new real estate development project, it is important to understand the steps that go into the entire process. New real estate development is usually not as clean-cut as an acquisition of an existing asset, but they also have the potential to be much more lucrative. Understanding this process will help you be an informed investor and be able to react to and anticipate situations appropriately with your partners. Our team has the experience and knowledge to help guide you through this process in order to turn your dream into a reality.
At Nochumson P.C., we are more than legal counsel. We are people serving our neighbors and community in Pennsylvania and New Jersey. Knowing that real communication between real people can help lead to real positive results, our team of attorneys is available 24/7 to help answer your legal questions and to fight for you with skill and fortitude, whatever the case may be. When you hire us, you can expect a sensible and cost-effective approach to legal counsel. We think fast, think ahead, and get things done. Contact us today or call us at (215) 399-1346 to see how we can represent you.