townhome, apartments or retail/office development questions

[Tristan Cortez]

We have a potential purchase of two residential lots 50x160 each. Across the street a developer built 15 town homes on 4 of the same size lots. We would like to do something similar but need help on where to start.

Q#1- Instead of building first and then trying to sell each town home, could we do it some other way?

Q#2- Is it hard/expensive to rezone a property from residential to commercial for a office/retail building instead?

Q#3- How should we determine whether to put town homes, apartments or office/retail space?

Q#4- What would be the best way to get financing (low money down)?

[Jason Hsiao]

Feel free to ping me to discuss further @Tristan Cortez, It's really difficult to rezone a property. Unless it falls within part of a broad specific plan the city is proposing or something extremely compelling cities will not haphazardly spot rezone. I personally prefer residential rather than commercial; it's much harder to find tenants for commercial tenants but once you do those are usually 5, 15 or 30 year leases so you'll have to consider if you have income source to hold through that initial vacancy period.

Every developer faces the challenge of determining what's the highest and best use for a property as well as exit strategy. Town homes will be the simplest after you consider construction costs, resale comps, and absorption rate for this kind of product in the area. Apartment you have the complexity of building a parking garage potentially and other amenities like a pool or gym, along with considering the lease up period, what vacancy rate you can achieve, and if you're holding for cash flow or reselling it to a fund after you're done with all that. Given it's 50x160 x 2 lots / 43,560 = 0.37 acres I don't think you'll be build a product sizeable enough to get that kind of attention so you're left with individual investors and that could take much longer to sell. For commercial your build out cost could be lower and your exit motion is similar w/ apartments but again you could have much higher initial vacancies.

Financing wise if it's possible start contacting private money, otherwise you can get construction loan, and try to extend to a conventional loan later. Most likely the bank will loan to 65% LTV, give or take.

If you don't want to mess with all of that, you could go through all the entitlement process w/ the city/county and flip it to sell to a developer that's more familiar w/ the development process at a higher price, say... the guy across your street ;-)

Hope that helps, sorry I didn't answer your questions in order.