Development of multiple residential, commercial or industrial properties follows a process. That involves identification of the site, investigation of site specific issues, design, submission, approval, construction and finally the presentation to the market of the finished product. It is at that time that all of the projections hit the reality of the market place. TIME is the issue.
Site issues involve soils, water, sensitive land (wild life) and proximity to schools, roads, and services such as water, sewer, power, fire and police. Once the feasibility of these issues are addressed, you then have to lay out the project to maximize its density and that has to be done as a function of aesthetics to make it marketable. These first steps alone for even a small commercial building of say 10,000 square feet can easily run you upwards of $30,000. Time: 30-180 days.
With the preliminary answers you go to the municipality for preliminary design review, prepare detailed plans and specifications, and then you submit it to the building department. This is where developments go to die. Each and every section of government gets their shot at the project and even though you may get close to what you submitted for approval, you are now subject to another wild card. This is called impound fees and mitigations. After all, you are now responsible for creating traffic, using fire protection, impacting parks, schools, water, sewers, etc. These are all costs passed on to the developer in the form of fees. Cost can easily be another $30,000. Time: Could be 8-12 months.
Now we proceed to construction. Here you are now subject to all of the changes which have occurred over a period of at least a year. Labor, materials, insurance, bonding, etc. have all gone up and since the market is hot and there are lots of jobs, then you cannot bid things as tightly. Cost can be another $2,000,000. Time: 4-8 months.
Yeah, your building is now built and ready to market. You had to have at least half of it leased in order to get financing, so now you are only half way to success. In a good market you might complete the leasing, construction and then the permanent financing quite quickly. Cost, another $500,000. Time: 3-6 months.
Bottom Line: Development is risky and requires personal financial strength and a strong constitution as well as picking and choosing the right property, professionals and markets. Is it any wonder that developers are entitled to rewards for the risks that they take?