Investors exploring development opportunities may encounter challenges this year due to looming speculation about a recession and rising interest rates. The uncertain market conditions and fluctuating demand could lead to significant delays or even the abandonment of development projects. Property developers, who oversee these ventures, will face tough decisions in the days ahead.
If you are thinking about investing in a development project, there is a potential for higher returns, but it also comes with heightened risks. In this article of the series, “Making Investing Decisions in Today’s Development Market,” we will discuss the crucial factors that require careful consideration when contemplating development investments. Keep these aspects in mind as you search for available land for sale.
Look at entitlement requirements
Obtaining entitlement refers to the necessary legal process to gain approval from a city for your development project. Although, certain authorities in the major cities grant a right of development, allowing building without seeking entitlements, but various challenges and complexities can still arise. For instance, building restrictions might apply in historic districts or neighbourhoods near transportation infrastructure, making the construction process challenging. To navigate through the approval process smoothly, it is’s advisable to engage zoning and transactional experts. If you wish to minimize risk, seeking projects that are already fully entitled could be a viable option.
Be aware of environmental issues
Before proceeding with your development project on the purchased land, it is’s crucial to consider the soil’s consistency and its potential impact on the environment. To ensure compliance with environmental codes in the region, you’ll need to conduct a
Phase 1
Environmental Site Assessment:
which investigates the project’s history. If there are indications of possible contamination.
Phase 2
Environmental Site Assessment:
This step involves soil sampling which may be necessary. Seeking expert counsel for this process is essential, as obtaining a clean environmental report (or effectively managing any exposure) will be a critical aspect when entering into a contract.
Recognize capital for development is key
In the context of business planning, it is essential to recognize that despite creating a well-structured timeline, delays in obtaining necessary approvals and supplies can lead to prolonged waiting periods. Additionally, unforeseen expenses may arise, exceeding the initially forecasted financial requirements. Inadequate capitalization can further exacerbate these challenges, especially if borrowing funds or committing to returns for investors, leading to potential cash flow strain within the project.
However, experienced investors often adopt a strategic approach to securing sites by placing soft deposits on contracts that are contingent on obtaining approvals. This method requires speculation on the costs associated with obtaining entitlements and approvals. If successfully executed, it could yield positive outcomes, enabling the option to sell or flip the contract for a return on investment. It is crucial to emphasize that this endeavor carries inherent uncertainties and no guarantees can be assured in this domain.
Know that lenders will be careful
Securing financing in the current market can prove to be particularly challenging. Lenders have adopted a cautious approach, especially when it comes to the riskier segments of real estate investing. As a result, they are more inclined to offer construction financing to developers with extensive experience and strong credit backgrounds. Notably, construction loans often require personal guarantees, which could have severe consequences for private individuals if the project encounters setbacks or fails.
Given these potential risks, seeking professional guidance is crucial before proceeding further. Consulting with an attorney can help assess the legal implications and potential liabilities associated with personal guarantees. Additionally, it is advisable to consult a mortgage broker to gain a clear understanding of the prevailing financing realities in today’s market. Being well-informed and making informed decisions will be paramount in navigating the complexities of securing financing for real estate projects.
Ask about incentives for development
In some cities or states, the availability of assistance programs can present attractive opportunities and alleviate the financial burden associated with development projects. In certain markets, these incentives may even be essential to initiate a project successfully. For example, considering the current high land prices, obtaining a tax abatement can be crucial to make rental development financially viable. Additionally, municipalities may have pilot programs or incentives that support public infrastructure based on your project’s plan.
While pro-development markets may offer a conducive environment for construction, it is essential to remain vigilant about potential competition from neighbouring developers. To enhance the feasibility of your project, having a steady income stream from sources like parking operators or short-term retail tenants can be advantageous. However, it is important to ensure that all leases are cancellable to prevent any hindrance to the development process.
Ultimately, leveraging available assistance programs and strategically managing income sources can enhance the prospects of successful real estate development while navigating potential challenges in the market.
Finally, remember that when you are investing in a development project, it is not a question of where the market is today. You will want to be looking two to three years down the road when the project is ready to bring to market. It can be difficult to predict the future, but if you are in a supplied-constrained market and you deliver the right product at the right time, it can lead to a very successful project.
Conclusion
Investing in development projects in today’s real estate market presents opportunities and risks. Speculation about a recession and rising interest rates can lead to delays or project abandonment. Crucial considerations include entitlement requirements, environmental issues, proper capitalization, and lender caution. Exploring local incentives and assistance programs can ease financial burdens. A forward-thinking approach, considering market dynamics two to three years ahead, enhances project success. Seeking expert advice and prudent planning are essential for informed decision-making. Balancing due diligence and risk assessment can lead to successful investments, offering potential returns and sustainable growth in the development market.
This article is written by Waqar Ahmed. Waqar is a research analyst at the Iqbal Institute of Policy Studies (IIPS).
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