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!

[JM Payne]

First and foremost, I would also advise you to buy existing, as it is going to remove most of the headache of new construction as well as the added cost, hassle and time.  Further, it sounds like you don't follow RE trends...right now isn't the best time to be adding commercial retail space when you can basically snatch it up for pennies on the dollar in most markets.  That being said...

1. How or where can I find good real estate agent who can help me with this?  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?

Yes.  Buyers often have closing costs, inspection expenses, financing charges, and other fees above agent commission.  This is not unique to strip malls.  Regarding good agents, I would check loopnet.com to see who has the best track record in your local market, or consult with a local investor.  You are specifically seeking a commercial agent.  

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)

While the agent will generally make more on a building as opposed to raw land, your agent is steering you in the right direction.  You're going to bankrupt yourself putting up a $2.5 mil building trying to save 6% (of land cost, no less) on the agent's fee.  Building new commercial retail is a losing proposition in a lot of markets around the U.S. these days.  Take a look at retail vacancy rates and you will be astounded.

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.

Site surveys, soil testing, environmental studies, archaeological surveys, perk testing, wildlife studies, code variances, and I can keep going on and on and on.  Assuming all that is good, then you need to hire someone to design the thing.  Plans have to be drafted, submitted and approved, etc etc.  

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?

Yes, your lender will most likely want to see the full plan.  Plans come from architects, and then get stamped by engineers and then approved by code enforcement officers.

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

Consult local people you trust as well as company references.

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

This completely depends on what you decide to put up.  Engineered metal goes up in a long weekend.  Stick built could take months.

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

Honestly I would hire a General Contractor/Project Manager.  I would also visit weekly.

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?

For the lease portion, you don't actually need a lawyer.  You need a commercial real estate leasing agent.

I hope that I have done a good job of encouraging you to buy used.  It will be far easier, far cheaper, and far less likely to drive you bankrupt.  Whatever you choose, good luck!  

- JM

[Ronald Rohde]

Originally posted by @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?  I would contact local Chambers of Commerce, look for commercial agents only, not residential.

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) Its good that you're aware of his motivations and incentives, but here you should really consider buying existing first, if the building looks old or outdated, consider investing cash into substantial renovation. Add landscaping, paint, decorative exterior elements, etc. You can spend as much as the rent can support.

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.  Purchase and Sale Agreement (lawyer), LLC (lawyer), Phase I environmental (firm), design plans, site plan, drainage, parking, (architect/engineer), zoning, density, etc. there are a lot of pieces that must be completed.

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? architect

4. How do I find good construction company ? Is there website that has lists of companies? Do I need yellow page book? Get referrals from your broker or lawyer.

5. What is average time of building a 10K sqft strip mall ? too many variables, but 6-12 months in Texas right now.

6. What are the important steps during construction process of building?  ie. getting permit? how often do I visit construction site? Many important steps, you need a full service fee developer who will be on site daily. You can visit as much as you want.

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 would hire a lawyer prior to putting any offer in for purchase. Submitting an offer with a company name is more formal and professional than individual names.

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!

[Greg Dickerson]

@David Kim I am working with a dentist doing this exact same thing right now. It’s a great strategy but you need to know what your doing and hire the right team to help you.

If you buy the land right you should be able to build a new building for less the the cost of an existing building once you factor the up-fit. Many retail strips are overpriced in most markets.

You will create substantial equity building vs buying as well.

[Doug Smith]

Hi @David Kim. I spent 25 years in banking and I will tell you that banks love dentists! They will want to put you into an SBA loan of some sort (probably a 7A or 504) which will lock up your primary residence and any other thing that the SBA/Bank can grab as collateral. I do agree with others that you should consider the cost to construct vs cost to buy existing. Retail is really depressed right now, so you might be able to find a suitable existing place that you can rehab to fit you and your wife's practice(s). I have been out of the SBA game for 5 years, so chat with a GOOD sba lender in Atlanta. Don't just walk into the bank branch. Ask other dentists who they use. There are SBA lenders out there that specialize in medical professionals. If you can stomach the downstroke to avoid the SBA, that might work better. Banks make a lot more an SBA loans than they do conventional portfolio commercial loans, so they really will push you in that direction, but I would start by chatting with a good lender to get the financing part in order prior to looking. 

[David Kim]

@JM Payne  : Thank you for your feedback and advice. Apparently, I am new to RE world, and trying to learn here. I can see that what you mean by trend is not good time for adding commercial retail due to many shops closing due to Amazon and other online retail shops. 

[David Kim]

Originally posted by @Ronald Rohde:
           Thank you for your your input. Obviously building is more involved and costly than buying existing. I am certainly open to buying existing as well if I can find right building in right location and layout that is favorable for dental office utilization. I can sustain loan payment for real estate as long as dental office is doing fine. Problem is I do not see many listings that I am looking for around my area. I would like to open dental office in 12-18 months period. Since I plan on utilizing 60% of building for my dental offices (which are usually successful with decent or average location), I feel like I can lower the risk of new construction retail . I need to look for only 40% of lease, but again, please feel free to comment on this. Thank you

Originally posted by @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?  I would contact local Chambers of Commerce, look for commercial agents only, not residential.

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) Its good that you're aware of his motivations and incentives, but here you should really consider buying existing first, if the building looks old or outdated, consider investing cash into substantial renovation. Add landscaping, paint, decorative exterior elements, etc. You can spend as much as the rent can support.

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.  Purchase and Sale Agreement (lawyer), LLC (lawyer), Phase I environmental (firm), design plans, site plan, drainage, parking, (architect/engineer), zoning, density, etc. there are a lot of pieces that must be completed.

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? architect

4. How do I find good construction company ? Is there website that has lists of companies? Do I need yellow page book? Get referrals from your broker or lawyer.

5. What is average time of building a 10K sqft strip mall ? too many variables, but 6-12 months in Texas right now.

6. What are the important steps during construction process of building?  ie. getting permit? how often do I visit construction site? Many important steps, you need a full service fee developer who will be on site daily. You can visit as much as you want.

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 would hire a lawyer prior to putting any offer in for purchase. Submitting an offer with a company name is more formal and professional than individual names.

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!

[David Kim]

Originally posted by @Greg Dickerson:
Thank you for your reply. It is nice to hear that I am not the only dentist doing this. 
Can you explain little more about right team in the order of I need them?
Real estate agent, banker, lawyer, CPA, developer, archtech, construction contractor etc.  Who should I talk to first? then second?
I believe that developer would oversee entire RE project, and do you know where (or keyword) I can search developer who deal with small project like this? and how much does it cost to hire developer for project like this?

Thank you

@David Kim I am working with a dentist doing this exact same thing right now. It’s a great strategy but you need to know what your doing and hire the right team to help you.

If you buy the land right you should be able to build a new building for less the the cost of an existing building once you factor the up-fit. Many retail strips are overpriced in most markets.

You will create substantial equity building vs buying as well.

[David Kim]

Originally posted by @Doug Smith:
Thank you for your reply. I contacted a couple banks regarding SBA, but sounds like they want know property or land I want to buy before giving me any detail on loan information (terms or other details), but I have not selected RE property yet. What could be other information the bank can provide me before I select property and submit application? 
Thanks

[Greg Dickerson]

@David Kim I would be happy to discuss. Too much to post here. Feel free to shoot me an email and we can set up a time to talk 

[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

[Doug Smith]

A good banker should be able to gather some basic information from you and give you guidance with respect to the amount you can comfortably afford and qualify for prior to making an offer. I am going to assume that you and your wife file joint returns. I would gather up your 2018 and 2017 personal tax returns complete with all supporting schedules to start with. Flip back to the Schedule E on those returns and also gather up the 2018 and 2017 tax returns for any entity that appears on that Schedule E. For each of those entities, also gather up your year-to-date 2019 profit loss statement and balance sheet. Grab the last three bank or brokerage statements for the last three months for all personal and business accounts you have. If you have prepared a business plan, I would share that as well. Bankers like cash flow information, so at least do realistic financial projections for the next 3-5 years for the new business and property. Since you are a dentist, they will typically not be as concerned about you starting a new business as they would if you are in another field. Find a really good, experienced local business/commercial banker to chat with. Ask other dental and medical professionals for referrals. If you can provide a good banker with the information I just mentioned, they should shepherd you through the process...or they are not the banker for you. Good luck. 

[David Pierce]

As for the broker find a CCIM who is good at retail in the area you want to be in. I am a CCIM and they will know almost everything you are asking.

They will know:
* Land Prices
* Market Rents
* Fee Developers

Plus they are investment experts.
And they can help you lease it out.

But as someone posted above retail is in the tank in a lot of markets. So use that same CCIM to find an existing shopping center that can be rehabbed. A lot cheaper in a lot of markets.

http://www.findaccim.com/

[David Kim]

Originally posted by @Shane Melanson:
         
This is awesome! Thank you for very detailed comments on many questions I had . I will do little for research to digest this great information. Thanks!
I have few more questions in your comments

3. Risks:

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

                    - Can you explain access points and services (deep)? I figure access points will be entrance to property, but no clue on 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.

                    - Sounds like this will be venture for me if difficulty scale of 7-8. Do you think this is something I can handle my own without relying on developer? or I must get help from developer from beginning to end? I am willing to do my homework and research with spend time, but I would like to know if this is possible or not. 

Thanks!

[Shane Melanson]

@David Kim

Access is to you site. Is it right in right out or all turns? Lit/controlled?

Services- water, storm, sewer, power. Typically called deep services.

Don’t know if you need a developer - but a PM or someone to guide you would be a benefit.

[Ronald Rohde]

Google "full service or fee real estate developer Atlanta, GA"

[David Kim]

Originally posted by @Doug Smith:

Thank you for follow up comments on my questions. This is great!

[David Kim]

Originally posted by @Shane Melanson:

Thank you for answering follow up questions. I appreciate it!

[Shane Melanson]

@David Kim happy to help