Commercial Real Estate Development Process

When a piece of property is purchased and developed for commercial or business purposes only, it is classified as commercial real estate. Most commercial property is owned by one entity and leased to one or more tenants. But in some cases, the owner of the property is also the one who uses it.

Commercial real estate development includes every type of property that doesn’t deal primarily with living spaces, such as retail stores, malls and shopping centers, industrial parks, gas stations, office spaces, restaurants, convenience stores, and hotels or motels.

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Basics of Commercial Real Estate Development

Unlike residential real estate, commercial real estate development involves four main classes of buildings, which are based on the function of the structures: office, industrial, multifamily and retail. These can then be broken down further into Class-A, Class-B or Class-C buildings.

  • Class-A: This classification represents the best buildings in terms of aesthetics, age, infrastructure quality and location.
  • Class-B: Buildings rated Class-B tend to be older and not as competitively priced as Class-A buildings. They are typically more attractive to investors who want to refurbish and sell the properties for a profit.
  • Class-C: These are the oldest commercial buildings (20 years or older). They are often located in less desirable areas and might be in need of a lot of repairs compared to buildings with higher ratings.

Commercial Real Estate Development Process

When you’re looking at potential commercial real estate development opportunities, there are certain elements worth considering:

   

Market saturation: Learn the local saturation level for the type of project you have in mind. For instance, if you want to build a hotel, ask yourself, “Is the area already overloaded with hotels?” If it is, you might want to look elsewhere. Alternatively, think carefully about how you will make your hotel stand out from the rest.

Local zoning laws: Before you buy property, be sure the local zoning laws permit completing the project according to your vision. Developers often realize they have problems with local zoning laws too late in the process.

Crime: What’s the crime rate where you plan to build? If you got a great price on a property because crime is high but the area is improving, that might be advantageous. But if the area is not up and coming, you might wind up with a poor investment.

Natural disaster risk: A lot of people dream of owning a beachside bar in Florida, but what happens when a Category 4 hurricane blows through? Developing in an area with natural disaster risks means you have more to consider, such as building materials, special zoning laws, insurance and more.

Potential liabilities: When you find a property you like, don’t take it at face value. Instead, dig deeper. Some properties have hidden liability issues that cause a variety of problems. For instance, a building might need asbestos or lead paint removed before it can be used. Additionally, research a building’s history. If it housed a previous tenant who worked with chemicals or toxins, you could be adopting an environmental nightmare.

Building a Development Process Checklist

It’s important to conduct due diligence on a property because most surprises aren’t positive when it comes to commercial real estate development. Before you start planning and developing a project, use this commercial real estate development process checklist to ensure you have everything covered.
 

Pre-Acquisition of Property Checklist

  • Confirm seller’s name on title (section Schedule A)
  • Confirm accurate legal description of property on title
  • Confirm zoning verification
  • Obtain recent surveying and/or plat maps
  • Obtain UAV topographical survey

Financials Checklist

  • Check for tax liens
  • Have appraisal performed
  • Check for judgments

Utilities, Access and Environmental Checklist

  • Confirm access to utilities
  • Obtain and review declaration of covenants, conditions, restrictions, reservations and easements
  • Review mineral, oil and gas rights
  • Obtain and review environmental and engineering reports

Existing Property Checklist

  • Check accounting of rents, income, common area maintenance, tenant tax contributions, rent roll and other rental-related documents
  • Obtain security deposits and other tenant amounts, if applicable
  • Obtain a copy of existing insurance policies, certificates and pending claims against the property
  • Obtain a schedule of pending litigation, if any, affecting the property or seller’s ability to convey the property

Construction Checklist

  • Document pre-built natural land features
  • Document underground utilities
  • Document in-slab utilities
  • Photograph progress

Post-Construction Checklist

  • Provide documentation to facilities teams
  • Use video, or video walk-throughs, to presell units
  • Use video marketing to secure future investment and bids