The Process of Developing Land
Developing land can be a laborious but profitable endeavor. Southeast Venture started developing land back in 1981. The landscape has changed a lot since then, but the practice of developing land remains the same.
Commercial real estate developers take land that doesn’t currently have any applicable commercial use and turn it into a marketable product. This can take many forms. The use of the land is dictated by the local population, desire of the land owner, and zoning capabilities of the land.
Attention to detail, knowledge of the market, and intelligent planning can make the process of developing land move much more smoothly.
Here are the six basic steps that Nashville commercial real estate developers navigate to make a raw piece of land into something useful.
1. Evaluate the Land
All pieces of land are not created equal. Different areas have different affordances and difficulties to overcome that must be determined beforehand. There is a lot of work to follow that will all be dictated by the chosen piece of land.
This is an investment. So the primary concern is going to be the potential return on that investment. Does the land have any large encumbrances that will need to be removed? Will the area support a new business? These and other considerations will affect how much money will need to go into a property as well as how much money could be received once the development is complete.
2. Determine Cost
Your offer for a piece of land will have a lot to do with what you determined as you evaluated the land. The potential work that will need to be done in order to get the land to a point of construction will count against the money offered for the land. The cost of acquisition, plus the projected construction cost, must be a good amount less than the projected final sale. If it’s not, the deal won’t be worth the developer’s time.
The final sale and the projected construction costs won’t have much wiggle room. This is why the offer price is the variable that changes. There will be an upper limit to the price a developer is willing to pay for a piece of land if they hope to turn a profit in the end.
3. Research Zoning
It’s time to start planning out the design of the project. What type of property will it be when it’s done? This is going to be largely dictated by the pre-existing zoning for the area. The general type of construction — single family home, condominium, or commercial — will be dictated by the zoning. The city won’t allow you to build a shopping mall in the middle of every residential area. So you need to be sure your area will legally allow the type of construction you aim to build.
Nashville commercial real estate developers will obviously want to make sure their potential land purchase is zoned for commercial use.
These projects require a lot of upfront capital. Investors and lenders are often necessary to get the job started. This money will be needed to cover the cost of the land as well as the construction. Working with the raw land until it’s ready to build upon, constructing the commercial structure itself, and getting it ready for operation comes with a hefty price tag.
The loan-to-cost ratio is used to compare financing to the cost of completing a project. This is used to determine the risk of a loan. For instance, if the construction will cost $100,000, the lender might offer a loan of $75,000 which makes the loan-to-cost ratio 75%.
Now that financing has been secured and the land has been purchased, it’s time to get to work. The land itself will need to be conditioned. Any large rocks, trees, or any other encumbrances need to be removed. The land will need to be graded. And then the structure itself will finally be built.
Nashville commercial real estate developers will hire and oversee the contractors that build the structures. Money acquired in the financing stage will pay these contractors as each stage of construction is completed.
All the work done prior to purchasing and working on the land will make this section of the process easier. It will be much easier to sell your piece of commercial property if you already know the neighborhood will support it. This can be used in your marketing pitches to local business owners. There are many tactics that can be used to find potential buyers — online ads, networking, realtors, etc.