Being around developers for much of my younger life (my dad was an architect), and having bought several small, positively cash-flowing properties, I obviously now want to be a developer.
And I have an opportunity. I’ve been turned on to a small-businessman who is currently leasing space for his auto repair business. He’s been managing it well, and it’s growing to the point where he could use a larger space, but wants to stay in the area. There are no adequate buildings currently for sale, that I can find (through Loopnet and a few of the other websites) in the area, but there is land a-plenty. It’s in a fast growing part of Colorado, so the land isn’t dirt-cheap (no pun intended), but there’s plenty of development in the area, so it’s probably affordable.
So if I want to build something, and have him be the tenant, what do I do? How much cash is needed for a down payment on a construction loan? Does he have to be a partner (hopefully not), or does he sign a letter of intent to lease from me if I build the property?
It seems not much differnent than when someone builds a shopping center or a mall for a major tenant. They’re usually signed on before the building is built. What are the logistics to make that happen.
OK, that explains the financing. What about the tenant. Like I mentioned, I have a guy who would be taking over occupancy of the building when it’s completed. He obviously can’t sign a lease on an unbuilt building. (or can he?) How do I ensure that when it is built that he’ll move in, aside from his word.
And to compare that to the big world, what kind of arrangement do the big boys have when they build a large shopping center or mall and have a large anchor signed on? What kind of legal arrangement are they operating under?
I would say a earnest money deposit would decrease his chances of backing out. Im not sure what your getting at with the second question. Are you asking if they would operate under something like an LLC maybe.
Sorry, I was afraid that might be unclear. Let me try again.
Here’s a hypothetical example: A developer is going to build a shopping mall. It’s not built yet, but there’s an article in the business section of the local paper that says “XYZ Developers is Putting Up a New Shopping Mall and Nordstroms and Sears Are Going To Be the First Tenants”. My question is, what is it that allows XYZ Developers to say that Nordstroms and Sears are going to be their tenants. Have they signed a lease on an unbuilt building? Or did they sign a letter of intent? Or some other thing?
I’m just trying to understand the logistics of it all, as I want to ensure that when my building’s done, the guy who said he’s going to move in really has to move in.
I can answer most questions directly related to funding but your stepping into the legal arena now. I would try reposting that question in the legal section. Unless someone else on the board wants to jump in on this?..
You just answered your own question. Of course, they’ve leased the space “prior” to completion. It would be no different than builders “selling” homes before they’re built. All the agreements need is a contingency clause.
Good Luck! IF you need more details, feel free to contact me.
I’ve developed a number of build-to-suit deals and typically negotiate the full lease up front and require it to be signed before starting construction.
However, in order to intelligently calculate the lease amount you will have to get a firm fix on costs. Obviously to do that you must have a site, and know what it will cost to develop. Typically a site is optioned to allow for the time to explore zoning approvals, preliminary engineering and a finance commitment. The option money is at risk, but it’s the cheapest way to control a site without going to contract.
Once the land is found and under control (option or contract), you get preliminary engineering done to establish the building/parking footprint and meet any development standards. Then you can get a soft estimate from a general contractor for total construction costs, preferrably a design/build inclusive figure (unless your dad will draw the plans), which requires tenant input as to the degree of finish to be delivered. You need that info to determine the rent amount for the lease, so take the time to get good numbers.
Assuming the rent amount is agreeable with the tenant, you then draft a full lease. It should recognize the construction timeframe and a delivery date, with contingencies for delays. Typically a rent-free period is given to allow move-in and tenant equipment installation, but the tenant cannot bail out unless you fail to deliver the space. Deposits are an individual decision… some do, some don’t. I deal mostly with national tenants and never require them. But with a local tenant it’s might be a good idea, as well as a personal guarantee regardless of the deposit.
As for the financing, your best bet will be with a local bank. if the landowner will subordinate to the construction loan you can get 100% financing for hard construction costs, then refi the construction loan after rent commencement to pay off the landowner. If not, some cash will be required, but how much will depend on the bank, your financial statement (net worth), experience level, and your development team (engineer, contractor, etc.).
Typically a site is optioned to allow for the time to explore zoning approvals, preliminary engineering and a finance commitment.
Hey, great information. Thanks!
I have a follow-on question.
I understand putting a contract on a property that I’m interested in. But what does it mean to option something? Is that something that a commercial realtor would do for me?
An option agreement differs from a purchase agreement in that it gives you, the buyer the OPTION to buy instead of the obligation that a purchase agreement would.
For example: Say you find a lot you want to build on. You have the current owner sign an option which requires option considerations (money) that is paid to the owner and is non-refundable even if you don’t purchase the property.
The length of an option agreement is usually much longer than a purchase agreement (several months or years) which gives you plenty of time to get the required approval and planning done.
If you figure out early in the option term that you can’t buy the property you can assign the option (provide you have the right wording) to another developer, farmer, whatever for them to complete a purchase. Thus potentially making a profit.