How to Successfully Develop Commercial Real Estate – Part 2

In Part 1, we pointed out how complicated developing commercial real estate can seem unless the focus is on the most important aspects of each phase of the development process. We also pointed out in Part 1 that there is a fundamental component that stretches across each of the major areas of the development process, from buying the land, to building the building, to attracting tenants, to managing the space as landlord and even refinancing or selling the completed project. This single component is money. All development projects need money, one must acquire the land, pay for certain up-front costs, pay to get the project built, and pay to support the building while finding enough tenants to fill it. Since development projects can be expensive most developers look to third parties such as commercial banks and investors to supply the money needed to “finance” the development project.So how does a developer get a commercial bank and equity investors to finance a new development project? Once again, focusing on the single most important factor to the lender and the investor supplies the answer. The single most important factor in attracting money (financing) to a development project is the belief they will get paid back (and hopefully make a little money). The most reliable way to prove to investors that they will get paid back is to attract rent paying tenants to the project.The tenant is the most valuable asset in any commercial real estate development project. Sign up the right tenant or tenant mix and you may be able to choose from a pool of eager construction lenders and equity investors to finance your development project. What makes the tenant so important? The tenant is the person or entity that will enter into a long-term agreement to pay rent, bring people to the site and make it attractive for other tenants and businesses. Rent creates cash flow and cash flow help lenders and investors form a reasonable belief they will get paid back. Of course, in a development project certain tenants, are more valuable than others. Most lenders and investors want to see tenants with, a long history of operational success, solid financials, well established brand or niche and a financially stable parent company or owner to guarantee the long term commitment or lease agreement.The lease agreement might be the most important document a developer can produce. It is the document that will be given the most weight by lenders and equity investors in determining their desire to loan or invest. The lease agreement establishes a legal obligation on the part of the tenant to pay the developer rent often over a long period of time. Of course, getting a tenant to sign a long term lease is not that simple. Remember the building(s) is not yet built and probably will not be for a couple of years. So how does a developer find these coveted tenants and get them to sign a legally binding contract to pay them rent in a building that doesn’t exist yet? We will explore the fundamental key to successfully finding and securing tenants in Part 3 of this Article.