Commercial Opportunity...your thoughts please!?

[revdev]

Hi everyone,

Need your thoughts on a potential commercial opportunity we have been presented with.

Background My parent's family trust owns a decent slice of industrial land in an area of town that is in a constant state of development and activity. About 2 years ago we did a loose feasibility study regarding the development of this land into a subdivided build & lease type project. We put this on the backburner due to the costs of fully developing the site.

The industrial area, whilst in mid-sized town NZ, is in high demand and is tightly held. My father has been approached 3 times in the past 2 years with cash offers for the land.

Opportunity In the past month we have been approached twice, via agents (principles actually) with clients who have outgrown their current locations and looking for custom built premises.
Both clients are local and are known to have a solid background. Both agents are commercial specialists and our family has dealt with them in the past.

The clients have literally approached the agents, with building plans in hand, saying "find us someone who can
build this and we'll sign a lease agreement".

Thoughts Neither my father or I have any experience in development (only residential B&H) but we are looking at this as a real opportunity to move into the commercial area. My father has a considerably lower risk profile than me, but this has even perked him up.

I would really appreciate any advice from some of the seasoned commercial folks on PT as to the next steps we should be taking to do this properly.

Thanks in advance everyone
G

[BusyLizzy]

Hi RevDev,

I can't help you with this one - but it sounds like a fascinating opportunity for you and your father. I just thought I'd bump it up to encourage others that can help to respond.

Good luck!

[BamBam]

Hi Revdev
To me it sounds like something I would take to the next level. Sitting on bare land is a bit like leaving money in a low interest bank account in that its not giving you the best value return.
My next steps would be:
Take a copy of the building plans to a builder experienced in this type of build. You only need one ball park figure initially to give you a rough idea of cost. Down the rack you put the build out to tender and welcome bids from several companies.
Take the rough cost and plans to an experienced development finance broker to discuss avenues of funding.
Take plans to an experienced valuer to get an idea of the value of development once completed. They should also be able to tell you what the market rents will be rather than relying on a leasing agent with a bias opinion.
If all this gathered info and opinion checks out and sits well with you then you go to the next level.
Negotiate the terms of the lease with you tenant. Your finance guy will have told you what they want to see on the lease in terms of initial term and rights of renewal, and the commencement rent needed to satisfy the loan. Hopefully the tenant is willing to pay more in rent than its going to cost you in loan repayments making it +cf. If you can agree on terms have your lawyers draw up an Agreement to Lease (lawyers fees payable by the tenant) which will be subject to the building being completed by a specified date. Take the agreement back to your financier and away you go.
Obviuosly there are a million and one details and and much arm wrestling with council etc but once youve done one may it will lead to the next.
Good luck

[revdev]

Hi Lisa,

Thanks for your kind words! Yes we are quite excited about it...I have agents throwing residential deals at me at the moment, but I'm having trouble concentrating on it , with the commercial opportunity available.

Bambam, thanks for your reply, this was the sort of information I was hoping to get. Question for you - when approaching finance companies on this, what sort of LVR/deposit etc is usually required?

Many thanks
G

[Orkibi]

Hi Revdev

If I was in your place, I would have contact Olly Newland for advice.
He have big experience with Commercial real estate.

Good luck
Hadar

[revdev]

Hi Revdev

If I was in your place, I would have contact Olly Newland for advice.
He have big experience with Commercial real estate.

Good luck
Hadar

You have read my mind on this Hadar! I am discussing this with my father at the moment.

G

[Glenn]

I am a real small fry on this sort of thing.
I am currently doing two building extensions for tenants at one site. One of these tenants is a large Govt department that are real difficult about paying me more money at rent review times. They happily agreed to pay the asking price. Then I upped it after discovering I had to demolish a bit of unused building to create more car parking (which no tenants wanted) again they came to the party and agreed to pay at a 10% return. (the land was already owned and not producing any money.) so yes all good stuff.
However the problem for me (being relatively new to developments) is the time it has taken. Like years and years. All the architects are busy. The structural engineers have enormous delays. The local authority took a lifetime to approve the resource consent. Then I could not get the builder to move. Then the plumber and the painters held him up. Oh it just seems to go on forever and ever.

I really do not know what the answer for all this is.
So yes all good and so on but make sure you get an expert to manage the project for you and make sure the delays will not come back and bite you.

[revdev]

Hi Glenn,

Thanks for your reply...some sobering stuff in there.

One of the advantages that we have is that both potential tenants are looking at standard type commercial buildings (Affordable sheds, Steel Sheds 'R Us etc), which will hopefully reduce the risk of substantial time delays.

Anyway, early days so gathering lots of info at the moment. This is very much a long term project for us, so we will take it one step at a time and make them the right ones (hopefully!!)

Exciting times ahead

Cheers
G

[BamBam]

Hi RevDev. Sorry for the delayed reply to your question regarding LVR/deposit. This is going to vary from lender to lender as some are more timid than others when it comes to developments. It would be worth your while talking to a few finance companies (rather than banks) to gauge which ones are likely to work with you and which ones are not. Remember you are after development finance and not a mortgage. In some case a finance company will finance the whole project if the value of the finished project is XX% more than the development cost AND the rent will cover the loan. If you have two parties who are willing to sign an Agreement to Lease pre build then you are in a very strong position to go to a lender and say "how can we make this work". Especially considering you already own the land!!

[revdev]

Remember you are after development finance and not a mortgage.

Hi Bambam, could you develop on this a little further as it's something I hadn't considered?

Thanks again for your comments
G