I want to build/construct a small strip mall

[David Kim]

Hi, my name is David and I live in Atlanta area.

I would like to purchase a land (around 1 acre) and build a small strip mall (around 10K sqft) using SBA loan. Me and my wife are both dentists (different specialties) and we like to occupy 60% of building with with two dental offices (one for me and another for wife) and lease out remaining spaces for side income. It will be new businesses (dental offices) for both of us. We plan on getting dental practice loans in addition to SBA loan to afford interior & equipment of dental offices. 

For real estate, my budget for land is $500K and construction is $2mil. I have liquid asset, which I can put 10-15% down for building, and collateral for 20-30 % of loan amount.  My understanding is that I this is minimum requirement for SBA loan (7a or 504).

I am new to real estate and I would appreciate comments or input to accomplish this. 

Assuming I found a land listing that I am interested already........

1. How or where can I find good real estate agent who can help me with this?    I spoke to an agent , but he was against my idea of construction of new strip mall due to its cost vs purchase existing.  Also, When I specifically asked about how the compensation is structured for purchase of land, I was told that buyer may have additional charges in addition to commission from the % of sale by seller (since price of land are not usually high) Is this common thing?  

Also, when I see an agent pressuring me to purchase an existing strip mall over purchase land, is that mainly because there is greater commission for agent?  Or buying an land and building an strip mall is bad idea in people in real estate industry? ( I understand that building a strip mall is a lot more involved and time consuming than buy existing one)

2. What are the things that I need to look out for/ things to do prior to make an offer for the land? Specifically, what are the test or survey or initial site layout that would cost me that are needed prior to make an offer? and/or  during due diligence period? and what are estimated cost of these, which will be my out of pocket before SBA loan? Also, it will be good if I can get an idea of total out of pocket expense before SBA loan , not including down payment. 

3. Who is person I want consult for the layout of the strip mall? Do I need layout as part of business plan for SBA loan approval?

4. How do I find good construction company ? Is there website that has lists of companies? Do I need yellow page book?

5. What is average time of building a 10K sqft strip mall ?

6. What are the important steps during construction process of building?  ie. getting permit? how often do I visit construction site?

7. At which point , do I need to consult with lawyer , assuming LLC incorporating is done? ie. prior to lease reaming portion of strip mall?

I am sorry that my questions are not very organized, but I would appreciate if someone can enlighten me with this new venture I want to take.

Any website link or recommendation on reading that are specific to my project will be appreciated as well.

Thank you very much!

[Shane Melanson]

@David Kim - I have done several retail developments and will share with you some thoughts.  These are based on my experiences and may not all apply to you- but I think you'll get some value (even if it's 1-2 ideas).

The numbers are only for illustration.  You know your market- so plug in whatever they happen to be.  The importance is seeing how I come up with values (the thinking behind it).

I break developments into a few different Chunks:

1. Demand - sounds like you're taking 60% of the site.  This alone should get you to break even.

Here's how the #'er would look

1 acre= 42,560 sq.ft.  Assume 25% site coverage (likely a bit high) would equal 10,890 sq.ft  For easy math, lets say you build 10,000 sq.ft of retail.

You're taking 6,000 sq.f

Leaves you 4,000 sq.ft

Let's assume you were renting out to someone else.  Most banks will want to see 'market rents'.  

You didn't include any of those #'ers - so let's use mine and you can adjust for your development.

I have to think in major city in Atlanta, new retail is north of $25psf (might be wrong)? Calgary is $35-45 psf NNN

Value of your 10,000 sq.ft building:
$25 psf x 10,000 = $250,000 
Cap rate - for this - 6% = $4,166,000 Value 

(adjust based on your own calcs)

2. Supply

Land- I don't know you're market, but I've worked on developments in various cities (Houston/Dallas/Phx) and good retail land trades north of $1m/acre.  So I would confirm the land is serviced and zoned correctly first.  You want to be a developer- but if you're new to this, and having to rezone land, is a different animal, more risk etc.

Is the land serviced?  To the site?  Or, are you paying offsites to the City?  What other entitlement issues will you face?

Let's run your costs fast (very rough #'ers- have a spreadsheet I use- but lets us BOE)

• -Land $500k
  -Hard costs- $2M (sounds high- 200 psf for retail construction- I'm building at $130psf for hard cost)
  -Soft Costs- lets plug 20% for safety $400K
  -Leasing Fees (you're only paying for 4k sq.ft) 5% of your leases signed over 5 years and then 2.5% (my market- you're -might be different).  Assume $75k
  -Financing Costs - Assume $100k

TOTAL Cost: Let's call it $3.1M

Your Investment - if you can get away with 15% down - $500k

Profit - $4.1M- $3.1M = $1M

ROI - 200%

3. Risks:

If this is a new venture your biggest risks will be execution risk

General Contractor (and sub trades who do the work). Cost overruns?  Fixed Price/ GMP/ GMP with Upset. How are change orders going to work?
Architect- will do the layout.  How good are their drawings? Anything missed will be Change order.
Timing- weather, zoning, city, off sites, neighbors

Team Members:
Good commercial agent who understand retail and land development
GC with experience in retail developments
Architect - same as above
Mortgage Broker- who understand SBA and construction financing
Leasing Agent to lease up balance of space

Every market is different and a big piece of the puzzle for your development would be zoning, access points, services (deep).

On the scale of difficulty- what you're undertaking is about a 7-8 in difficult in commercial real estate.  Only thing harder, would be buying raw land and rezoning and then developing.

Lot's of moving parts.  

But, you can see- if done right- you can make a very healthy profit.

I expect you're building new - because of the potential upside.  And, possibly buying and developing for below replacement value.  You get exactly what you want.  And, you control the process.  

Our recent retail building is going to take us 5 months for actual construction.

The DP was 4 months (had to get architectural controls agreed to, DDSP- deep services with City) and then another 6 weeks for BP.  We started construction once DSSP was released.

So, I expect 1 year from closing on land to delivering a fully built out building (+ maybe 2 months).

If you're going to PM your project- min 1/week during construction.

I have regular check in with my GC/Architect.

There are not as many good websites to check out.  You could go to NAIOP (for commercial developers) - but geared to bigger players.

You can have a look on my site for videos and training.  I do some on commercial development.

Hope this helps