Mastering Real Estate Development: Essential Steps Part 2 of 2
Building a Strong Foundation for Your Next Project
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Carlo
This week, we conclude our two-part series on the Real Estate Development process.
”The real estate development process is a complex series of steps. Typically, it starts with a concept and ends with a fully developed property ready to be purchased or leased. A real estate developer has the skills and education to identify opportunities and the connections necessary to get a project completed.” - Prologis
We will cover steps 5-8 from the following list:
Project Visioning
Development Business Plan
Development Brief
Selecting and Appointing the Team
Planning Consents
Pre-sales / Pre-leasing activities
Construction
Completion and Lease-Up
This letter aims to provide a high-level overview of each step in the process.
I will dedicate deep dives on individual topics in future newsletters.
Let's dive in.
Step 5: Planning Consents
Planning consent is a critical step in the development process. It increases value providing legal permission to build.
Depending on the chosen strategy, a developer can decide to either sell or build out the project.
The timeline for achieving planning consent is significant and varies by country. It usually takes 6 months or longer for complex projects.
Planning consents usually come with conditions:
The consent will expire after a certain number of years. Three to five, depending on local regulations.
A Consent comes with specific conditions. Some will need closing before works begin; others can will approved during construction.
The developer also funds improvement works to surrounding streets.
Private equity-backed development projects pause after this step to pre-sell or pre-let up to 50% of the project to meet development funding requirements.
Step 6: Pre-Sales / Pre-Leasing Activities
The pre-sales or pre-leasing phase takes place after planning and before construction begins. The aim is to sell/lease a percentage of the project to assure funders that it will generate cash flow soon after completion.
"Engaging in pre-sales or pre-leasing can significantly reduce financial risks by ensuring that a portion of the property is leased or sold before construction is completed. This step is often necessary for obtaining construction financing from banks and other financial institutions." - Carter Jonas
For projects funded by bank development loans, pre-leasing is a prerequisite to the funding agreement.
The percentage may vary under the economic climate and the perceived risk of the project.
Step 7: Construction
The construction phase is when the product is delivered to the market. It's crucial because it signals to the market that the project is progressing. Visible activity accelerates leasing or sales decisions, providing a tangible completion date.
The most important step before construction is closing the building contract. This period is often frenetic, with project risks and costs scrutinised.
I have been involved in aggressive value engineering activities to make the contract agreeable for both the developer and the general contractor.
Contract forms vary, including Traditional, Design & Build, and Construction Management. The choice depends on the project's type (size, complexity) and local market norms.
In the UK, Design & Build is the typical contract form for major commercial projects.
During this phase, the employer's agent oversees the following activities:
Approve the quantity of work completed.
Notify the employer of any non-conformance between work and requirements.
Recommend monthly payments.
Manage the change control process.
"Maintaining clear communication with stakeholders and continuous monitoring of progress is vital during the construction phase. This includes obtaining necessary permits, coordinating with contractors, and ensuring that construction milestones are met." - Top10Real EstateDeals
Monitoring construction progress is crucial when major pre-lease agreements are in place. Delays can cost the landlord and contractor money. Long delays could result in losing a tenant.
Step 8: Completion and Lease-Up
Practical completion is a major milestone. It means the building is handed over to occupiers for their internal fit-out works.
The contractor must rectify any recorded snags. The developer retains about 5% of the money due to the contractor until all snags and defects get rectified.
Property management teams become more involved during the handover phases to prepare for operating the building post completion.
During this stage Leasing or sales activities continue and speed up. Customers can now walk through the building and see the space.
Summary
This issue concludes our mini-series on the development process.
As mentioned in the introduction, each topic deserves a dedicated issue. This 2-part series aimed to provide a broad overview of the many steps needed to develop real estate projects.
Whilst we have focused on describing the steps necessary to develop a predetermined project there are key activities occurring outside this perimeter: sourcing the deal, raising capital through equity partners, and securing development funding from banks.
These will be topics of future newsletters, so stay tuned.
That's all for today.
See you next week.
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