Alright I have a piece of land, now what do I build?

Question

Hey BP,

I'm new to the development game. With that said, I'm closing on my first 48-unit ground up deal in about a month. We're buying it completely entitled with an approved PUD in place, so we were not involved in any of the true development work on this project.

Looking ahead to our next deal, we have an investor who owns a piece of land in Brighton, Mi, an affluent well-supported suburb on Detroit, on which we wish to build. The lot is just off Main St. so we feel it is perfect to support a multi-family product. We've looked at existing products in the area and everything seems to be performing very well (no occupancy below 98%). Admittedly, this is about all we have determined at this point.

My question for BP is: what do we do next? How do understand things like number of units to build? What unit mix to build? How many parking spaces do we need? What is the highest and best use for the lot?

Should we engage a broker to help us understand the market better? Should we engage an architect to help us decide what to build?

Really looking for a good starting point here. What does everyone think?

Thank you, thank you!

- MW

Greg Dickerson · Answer

@Michael Wayne You need to do a feasibility study to determine highest and best use. A management company can help you with this. Check the demand and gaps in the market in the surrounding area. If all multifamily properties are full and have waiting lists you would seem to have ample demand for residential units. You also need to do a rent analysis to determine if rents will support new development. Follow the same approach for other types of commercial you think there may be missing.

If the project looks feasible the next step is to check zoning with the city or county to determine how many units you can get, what is required for all approvals including parking requirements, site plan and building permits, proffers, water/sewer tap fees, bonding requirements, inspections and CO process and time frame for all approvals.

You also need to check with the utility companies and get an idea of availability and cost estimates from them for water, sewer, power, gas, cable, installation and connection requirements, tap fees, hookup charges, transformer location and relocation, power line and power pole relocation issues.

Check to see if you have to install any manholes, fire hydrants, curb, gutter, sidewalks, street signs, street lighting any specific street design or access requirements,.

Check DOT requirements for access, stop lights and permits, traffic studies

DWQ requirements for permits, permit fees, time frames

This is  a broad overview of the process and your civil engineer can handle all of this but it's good for you to know exactly what's required.

Jonathan Orr · Answer

@Michael Wayne A feasibility study is going to answer a lot of questions as to if the market could potentially support a new MF development.  They wont give you exact answers as too cost or specs but will give you a generic understanding.

Before that, I would personally start with the city.  Go see what the zoning is and if you will need to get a zoning change or a variance potentially.  They will be able to tell you about densities based on the zoning and what general rules you will have to follow.  At the same time, brokers that focus in Multifamily complex investments would be a great tool (if you can get them to talk to you) to get rent numbers and vacancies.

Start collecting numbers for a underwriting to see if it is viable, if it is based on numbers. That is the point I would get a feasibility study done (can run you several thousand dollars for a good independent study), then you can focus on hiring people such as architects to make your vision real.

Barry Ruby · Answer

Thanks William. Getting a preliminary sense of demand can be gained by identifying built and operating projects in the market area of the planned development and determining their occupancy factor as well comparing their rent rates. Using this data to compare the existing, planned and under construction properties to the project under consideration for development is a good first step.

All of this data will be refined in a formal market study, but should give you a good sense of how the planned project "stacks up" against competing properties.

Will Barnard · Answer

Fantastic responses by @Greg Dickerson, @Jonathan Orr, and @David Edwards.

I really can’t add anything more than what they have already advised you to do. I will second what David stated about going to your experienced architect first, they can give you a great idea of what you can and can’t do with the lot without changing zoning, etc.

David Edwards · Answer

@Michael Wayne Another option for the feasibility study would be to go through a local architect. Any architect worth their salt will have a grasp on the local zoning code and can give you some general idea of what they are seeing for cost/sf until you can get a contractor involved to dial things in. These studies are often done for a flat fee or as an initial phase of their overall services.

I agree that reaching out to a management company would be a good step as well to determine if your understanding of the market is in line with what they are seeing, this can also give you an idea of whats expected as far as unit mix and amenities are concerned.

Another item that I didn't see mentioned above was impact fees, check with (or have your architect check with) the city to determine what additional fees are imposed on projects increasing density.

Good luck!

William Coet · Answer

Good post Barry.  Can you elaborate on how to analyze the demand in a market as part of the early analysis phase (before any analysis is payed for)?

Barry Ruby · Answer

Before spending any substantial amount of time or money on this or any deal, I'd run a preliminary analysis to see how the project performs. You can establish your unit count by using the units per acre permitted by the current zoning times the number of site acreage to determine the total units allowed by right. You can apply the unit mix (% of Studios, 1, 2 and 3 BD) and square footage of existing product and prevailing rents in the immediate market area for this first pass analysis.

Doing this drill should also inform you as to the structure the price, terms and conditions of the purchase agreement which should be your very next step before commissioning (and paying for) a feasibility or any other study, which makes little or not sense to conduct on any site that you don't have under meaningful control. The purchase contract should be structured to close at a point and time that you have all of your entitlements (shovel ready) and your debt and equity committed.

The highest and best use can be defined by doing the initial analysis and by continually refining your view of the Project as unknowns become known and more and or better information is learned during the pre-development due diligence process.

Drop me a PM to let me know if you need some help with doing the initial analysis.

Phillip Espo · Answer

This is gold. Thank you for such a great reply. I'm toying the idea around of a small new build project and this was a great rundown of the steps I'll be looking to perform. My google doc keeps growing because of excellent contributions like this.

Thank you

-Phillip

Phillip Espo · Answer

This is great advice and I really didn't think about it, yet. I'm looking to find a broker in Jacksonville, FL and I really haven't had a very easy time finding one that really seems to have a good presence online. This helps me narrow down, a lot.

Parker Eberhard · Answer

@Michael Wayne remember, too, that these large developments can take many years, so think about the needs of the area five+ years out

Alright I have a piece of land, now what do I build?

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