Commercial real estate is generally a safe investment. Commercial land prices are up, interest rates are low, and the federal government is spending money to help the economy recover from the pandemic. Before starting a commercial construction, there are a number of things to do first.
Here are 12 things you should do before starting a construction project:
- Choose your market area.
- Analyze market forecasts.
- Analyze codes, laws, and incentives.
- Create a detailed business plan.
- Create a realistic budget.
- Set a schedule for the construction project.
- Choose the right location.
- Conduct due diligence.
- Acquire the necessary permits.
- Acquire financing.
- Hire an architect and contractor.
- Buy the site for your construction project.
This article will explore the necessary steps that should be taken before starting a commercial construction project. It should be noted that in the modern economy, you can hire companies to perform most of these steps.
1. Choose Your Market Area
The first step in preparing for a commercial construction project is to choose the area you wish to service. This isn’t as simple as it would seem, even assuming you already have a general idea of what sort of commercial building you want to build.
There are two main questions that must be answered in this step.
- Does any particular area need the service or goods you intend to offer?
- How far will customers be willing to travel to access your service or purchase your product?
An essential step of market research is determining market needs and finding an area that needs the goods or services you intend to sell. The fewer suppliers for a particular product available in a specific area, the better your establishment’s chances of success will be. This will also help avoid over-saturating the market.
The corollary to analyzing market needs is determining how far customers will travel to access your goods or services. A single mother with two young children won’t be willing to drive nearly as far as to a grocery store as a childless twenty-something will drive to a vegan tattoo parlor.
2. Analyze Market Forecasts
Once you’ve selected the area you intend to service, you need to analyze future conditions in that particular market. This is especially important in today’s uncertain times.
According to Forbes, the near future is likely to see continued migration out of major cities into suburbs and small towns due to the lack of affordable housing in said major cities. So this wouldn’t be an opportune time to build a new commercial development in New York City or Los Angeles unless your intended development is affordable housing.
According to Market Watch, there are also concerns about a commercial real estate bubble bursting in late 2021 or 2022.
3. Analyze Codes, Laws, and Incentives
When preparing to start a commercial construction project, the last important things to research are relevant building codes, local zoning laws, applicable state and federal laws, and incentives.
This is often included under the aegis of “due diligence,” which will be explored later. Essentially, you want to ensure that the building you eventually build is legal in the area you wish to serve.
Depending on where you intend to build, there could be a substantial number of government incentives available. For example, the federal and most state governments offer incentives for energy-saving and environmentally responsible construction practices.
Adopting the incentivized practices, like using geothermal heat pumps for climate control and the installation of rooftop solar panels, can save you or the building’s eventual owner a massive amount of money over the expected service life of the building, as well as reducing its tax burden.
North Carolina State’s DSIRE Project maintains a database of these government incentives. Another example of government incentives is “Opportunity Zones” established by the 2017 tax cut package. These are areas where businesses can receive considerable tax relief in exchange for creating well-paying jobs.
4. Create a Detailed Business Plan
At this point in the preparation process, you know what you’ll sell, where you’ll sell it, and to whom you intend to sell it.
Now it’s time to assemble a formal business plan. A commercial real estate construction project business plan should include but not be limited to the following:
- Analysis of possible construction sites
- Basic construction plans
- Financial analysis of the market area
- The eventual name of the commercial building
- Earning projects
The more comprehensive a business plan is, the better. Banks, credit unions, and other sources of financing will expect to examine it before signing on to your project.
Your business plan tells the business community that you know what you’re doing, among other things.
5. Create a Realistic Budget
Now it’s time to start thinking about money and to assemble the budget for your construction project. That would generally be the job of your financial department, assuming you have one. If you don’t have a financial department, take your time on this step. Online tools such as construction cost calculators are available.
Your project budget must account for all expected expenses and make allowances for unexpected expenses. It should account for the cost of the land and the cost of construction per square foot of space.
Likely, construction costs include but aren’t limited to:
- Building materials
- General contractor and subcontractor fees
- Brokerage fees
- Insurance costs
- Cost of acquiring permits
- Possible government fines (although these are often tax-deductible)
Unexpected expenses could include:
- Damages due to weather
- Environmental cleanup and soil decontamination
- Overdraft and other banking fees
6. Set a Schedule for the Construction Project
Not only do you have to budget your money, but you also have to budget your time.
It’s time to create a schedule for your construction project. You have to figure out when construction should begin and when it should be completed.
Depending on the climate of your market area, the construction schedule should account for slowed or stopped construction in winter. A comprehensive construction schedule will account for the following:
- Time it’ll take to acquire the needed government permits and available incentives
- Ordering and delivery of materials
- Construction machinery delivery
- Hiring the construction workforce
- Allowances for possible delays
Several companies offer software to make assembling a commercial construction project schedule more manageable, and several high-quality Microsoft Excel templates are also available for free.
7. Choose the Right Location
One of the most important steps in planning a commercial construction project is choosing the location. At this point in the preparation process, you should already have:
- Selected your market area
- Have a good idea of your target clientele
- Know how far target clients are willing to travel to access your goods or services
- Know how much you’re ready to spend on the land on which you’ll eventually build
Other important factors include but aren’t limited to:
- Other businesses in the target market
- Your brand image
- Logistics of accessing and moving materials to the site
- Brand image
Brand image is often overlooked, but how your target customers will see your company should be considered when choosing your construction site.
It would be best if you didn’t choose a construction site sight unseen. An essential part of choosing a location is visiting the prospective sites and conducting proper surveys.
Four primary physical factors should be considered when comparing commercial construction sites:
- The physical dimensions of each site
- The topographical features of the sites
- The composition of the local soil and depth of bedrock
- Environmental considerations like the proximity to bodies of water
It’s probably a good idea to hire businesses specializing in construction site surveys to perform this task.
8. Conduct Due Diligence
Now it’s time to get serious about your commercial construction project.
The first part of initiation is conducting your due diligence. This is a surprisingly extensive list of preparatory steps that must be completed before many of the required permits and financing can be acquired.
Here are some of the things you’ll need to do to conduct due diligence:
- Know everything about the land you intend to build on and the local economy.
- Acquire legal counsel.
- Assemble a formal profile of your target customers.
- Have purchase contracts for the land drafted and many more.
Checklists for conducting due diligence are available online, and you can also hire firms that specialize in performing this task.
9. Acquire the Necessary Permits
Even property developers have to obey the law, and the government will have its due.
Zoning codes regulate what purposes land in a specific area can be used for and generally improve living and business conditions in a particular municipality. A zoning permit is a permission from the local government to use your chosen site for your intended purpose.
Once you’ve acquired a zoning permit, it’s time to apply for a building permit. This permit is nothing less than the permission of the local government to build your commercial building at your chosen site.
Failure to acquire a zoning permit could result in the imposition of considerable financial penalties.
10. Acquire Financing
In some parts of the business community, they say you should never invest your own money.
Why risk your own money when you can risk a bank’s? The reality is that the average bank or credit union will have more cash on hand than most commercial firms. So it’s a good idea to take out a commercial construction loan.
A significant benefit of acquiring outside financing is the increased flexibility it offers. If something goes wrong with your project and unexpected expenses emerge, having business partners with “deep pockets” can save your project.
Acquiring financing isn’t a simple process. Whether you work with a bank, a credit union, or multiple of either, they’ll demand to know everything about your business and your plans and projections for your new commercial property. This is part of why you have to conduct extensive due diligence.
One benefit of a typical commercial construction loan is that you only pay interest on the money you spend. If the loan is for $3 million, but you only spend $2.5 million, you’ll only pay interest on that $2.5 million.
Typical interest rates for commercial construction loans range between 4% and 12%, with repayment periods around 10 to 20 years. There will, of course, be fees; you have to pay the bank to consider financing your project.
11. Hire an Architect and Contractor
Once you have financing secured, it’s time to hire an architect and general contractor to design your building and build it, respectively. Rather than just hiring either right off the internet, you should request bids from several different companies to make sure you get the best deal.
Also, you should only hire companies who are licensed and adequately insured to make sure they know what they’re doing and will be able to compensate you if they do something wrong.
Modern computer-aided design technology can produce photorealistic three-dimensional renderings of your building, and you should expect to see such renderings from the architects competing for your contract.
It’s also a good idea to have physical mockups prepared, as things look different on a computer screen than in real life. You should give some consideration to simple aesthetics. Business owners are likely to refuse to occupy ugly buildings.
One thing you might not think to consider is the reputation of candidate architects and contractors in the local business community. It’s not unheard of for business owners to refuse to occupy a building because of its designer’s poor reputation.
12. Buy the Site for Your Construction Project
By now you’ve conducted your due diligence, acquired financing, and have several architects and construction companies vying for your contract. Using information from your surveys and the input from prospective designers and builders, it’s time to purchase the site for your commercial building. Or rather, it’s time to hire someone to buy the land for you.
The majority of contemporary commercial land transactions are conducted through middlemen called “commercial real estate brokers” or “commercial realtors,” who serve as liaisons between the landowners and commercial developers, and other buyers. They draft the contracts and paperwork for your land purchase or lease.
Commercial real estate firms will also coordinate land surveys if you choose not to hire a more specialized survey company.
When choosing a commercial realtor, you want to choose a firm that has established experience representing tenants/buyers in your chosen market area. Finding one can be as simple as asking other commercial building owners in your area, as commercial brokerages typically specialize in certain neighborhoods in major cities.
Outside of major cities, depending on local laws, commercial realtors often advertise on billboards. There are also typically internet databases of local commercial real estate firms.
However you find your middleman, they’ll help you purchase or lease your chosen site and start the construction process. But that’s another list entirely.
- the balance small business: How to Do Local Market Research
- Product Tribe: How To Research The Market And Identify Opportunities
- Forbes: 10 Commercial Real Estate Predictions For 2021
- MarketWatch: Distress Looms Over U.S. Commercial Real Estate In 2021
- h3: 7 Things To Know Before Starting A Construction Project
- DSIRE: Database Of State Incentives For Renewables & Efficiency®
- IRS: Opportunity Zones
- MARCH Construction / Consulting: 5 Things To Consider Before Building A Commercial Building
- PropertyMetrics: Real Estate Due Diligence Checklist
- Upland: Minnesota Commercial Real Estate – due diligence documentation checklist
- million acres: A Guide to Commercial Real Estate Business Plans
- Sior: A Guide To Prepare A Business Plan
- Pro Business Plans: Commercial Real Estate Business Plan
- Arc Construction: Tips On Starting a Commercial Construction Project
- RELIABLE Commercial Construction: Construction Site Due Diligence
- eSub Construction Software: How to Develop a Commercial Construction Project Schedule
- Construction By Daniels: How to Choose the Right Location for Your Commercial Construction
- Merchant Maverick: Commercial Construction Loans: Types & How To Apply
- Funding Circle: A Guide To Commercial Construction Loans
- BuildriteConstruction.com: How To Choose A Commercial Contractor
- Green Street: CPPI | Commercial Property Price Index
- BuildingJournal.com: Commercial Construction Costs Calculator
- Brainyard: Due Diligence Checklist
- Millionacres: What Does a Commercial Real Estate Broker Do?
- Nolo: How to Look for a Commercial Real Estate Broker