General:
- Underwrite conservatively. If you can underwrite it, you can own it.
- Curbs in deal is the best delivery condition for a developer not desiring to perform any site work.
- Return on cost is a key determinant of profit. Retail developers look for a 200 basis point spread, or a 20% return.
- Equity pref can be between 7 to 18% with 12% being the standard.
- Typically, a construction LTV is about 75% on single tenant credit lease financing with project cost of +/- $5 million.
- Construction loan from a local bank is about 75% LTV, 2 years interest only with an interest rate between 7 – 8.5%
- Development/Construction Management Fee must be included in the underwriting to cover the company’s overhead. Fee can range from $150,000 to $400,000 on a single tenant development.
Specific:
- Site work – which includes grading, parking, lighting, landscaping – can cost around $400,000 for a pad ready site anywhere between 0.75 – 1.25 acres.
- Dumpster enclosure is typically on the master developer and can at times cost over $20,000 if the design calls for specific materials, roofing, etc.
- Ensure that you can have above ground retention, because an underground retention can end up costing you $350,000 per pad.
- Account for road improvements. If you are developing a convenience store, take into consideration turn lane widening.
- Cold dark shell, ribbon slab can cost $120 per square foot. HVAC can add another $32 per square foot on a 6,800 square foot building. When able, put HVAC as tenant allowance.
Advice from Mistakes
- Not adding enough fluff in your underwriting.
- Assuming everything will go according to plan.
- Assuming numbers will stay the same.
- Make sure the cell in the spreadsheet is calculating properly.
Sample Spreadsheet: 6,800 sq. ft. retail (medical office) development
Image: Credit