Why Is Breaking Into Real Estate Development So Difficult? Here Are The Top 7 Challenges And How To Overcome Them.
Navigating the world of real estate development feels like untangling a maze of complexities, where each layer adds another challenge to the mix, making the odds of a project taking off seem like a long shot.
Currently, Realicore Property Management finds itself in the heart of a groundbreaking venture—an exciting double drive-thru Ono Hawaiian Grill in San Bernardino, CA. Join us as we delve into the hurdles faced during this journey, with a promise to spill the beans on what we've discovered to be the trickiest aspects.
Finding a good piece of land
Finding a piece of land that isn't overpriced, is in an area that is on an upward trajectory as far as job growth, demographics, other nearby development, etc., is the correct zoning for what you want to build and makes feasible sense is the first hurdle.
Making sure that the land isn't contaminated
Then you may have to complete a Phase 1 and a Phase 2 if necessary to be sure.
Finding the right tenant
Finding a tenant that is willing to pay the amount you need to eventually sell for a profit, but is also a reliable tenant that people would pay such a high amount for can be difficult. For example, Starbucks is going to sell at a lower cap rate than a mom and pop restaurant who are opening their 5th location. With the cost of construction and financing these days you are more likely to put together a development deal that pencils with a Starbucks. unfortunately this makes it hard for small businesses to get a leg up.
Covering high costs
Predevelopment costs are extremely high and must be out of pocket. We are out of pocket $200,000 for architecture, engineering, project management, permits, land holding costs, etc. Working with the city to submit plans can delay a project for months. You could have a strict planner who just won't let something go even if the rest of the neighborhood isn't affected. We had to make a 5% adjustment on some landscaping to fit the double drive-thru and the city took 3 months of back and forth to finally approve our requested change. Over 5%.
Finding the right contractor
Finding someone who is looking for a win/win situation and won't take advantage of you, and will finish the project on time and within budget isn’t an easy task.
Finding a the right lender
You’ll need to find someone that will lend on your specific type of project. Some projects are easier to get funding right now than others (Good luck building office space right now).
Selling the project
Lastly, you’ll need to plan to sell the project at a profit once it is built. Most lenders who don't want to buy and hold have already listed the project at 80% completion of construction and have sold the property to someone looking to do a 1031 exchange by the time the project is 100% complete.
Overall, we think the most challenging aspect of development at least for us so far, has been navigating the twists and turns of negotiations with the city to get the project to move forward. All of the back and forth and permit fees make developing expensive and It's no surprise that this financial hurdle often hampers the construction of much-needed housing and other essential projects in the area. However, our journey has shown that when a project boasts merit, procuring financial support from partners or investors becomes a smoother endeavor.
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