The Stages of Multi-Family Commercial Real Estate Development

Multi-family and mixed use real estate are becoming increasingly sought after by investors as well as potential residents. These developments often replace dilapidated or uninhabited real estate, vacant land, or brownfield space to create affordable housing options. Choosing to invest at the early stages of a project like this presents great income and appreciation potential. However, the process is complex with many unknowns and a variable timespan, requiring a broad range of expertise on the part of the developer. Before you get involved with a multi-family real estate project, take some time to understand the five main steps in this process and how to make sure you engage with a promising project.

1. Site Selection and Feasibility

Any real estate undertaking begins with research and due diligence. Someone wishing to develop a piece of property must first find a suitable building site. Site selection for a multi-family development includes:

• Discovering how strong the real estate market is for that location
• Understanding demand in that location for multi-family rental properties
• Reviewing comps (existing and planned supply) to gather information about similar projects
• Learning whether current zoning allows for the intended use
• Searching for any title issues with the property
• Environmental issues, such as wetland protection or health hazards

The developer will also want to understand the neighborhood more generally, including looking at data related to:

• Transportation
• Demographics
• Local economics
• Existing municipal or regional development plans

To determine the feasibility of a commercial multi-family project, a developer will take all of the above factors into account to calculate the pro forma, the data required to predict overall costs and returns. Land use feasibility and zoning requirements are both important when considering whether a multi-family project has the density to meet pro forma criteria. These calculations may evolve as new information emerges. Developers must also account for all costs associated with the project, including the removal of any existing structures or site grading. 

Investments made during the site selection and feasibility stage, therefore, provide for higher returns than those made during the later stages.

2. Building Design

The design of a multi-family building can take place in tandem with the site selection and feasibility studies since the site will, in part, dictate the design of the building. For example, the size and footprint of a development must fit the lot and meet any zoning and compliance requirements. In some cases, the building must look a certain way to blend with a design aesthetic set forth by the city or neighborhood. An architect experienced with managing the development of multi-family projects can anticipate any potential roadblocks in the permitting and entitlement stage, helping to head off any issues.

3. Permitting and Entitlements

There are two general types of approval/permits needed for a commercial real estate development: a land use approval and a building permit. Land use approval is often the most challenging and time consuming, especially if rezoning is required. Building permits typically come later and can include mechanical, electrical, and plumbing permits, as a few examples, ensuring that these systems meet strict building codes.

Any ground-up building project must undergo an entitlement process. Compared with permits, entitlements are less cut-and-dried, leaving room for interpretation. The entitlement process focuses on the structure’s intended use and appearance. Real estate entitlements include a broad range of approvals, such as:

• Zoning variances or rezoning
• Site plan approval
• Architectural design approval
• Landscaping approval
• Utility approval
• Road approval

This process takes time since it often involves numerous stakeholders. The city council, other business owners, and the public could be asked to voice any concerns and ask questions before allowing a project to proceed.

4. Financing

Concurrent with the above stages, the developer will seek investment from the capital markets.  There are two primary sources of capital that a developer may pursue: equity and debt.  

• Equity capital – This capital is often provided by individual accredited investors, family offices, private equity firms, and pension funds as well as the developer. Equity capital often comprises 30-40% of the project’s total financing requirement. These equity investors receive ownership interest in the project and enjoy all of the upside from the project’s returns. 
• Debt capital – This capital is often provided by banks or private lenders and comprises 60-70% of the project’s total financing. Debt capital is also secured by the project’s assets, however, this type of investment does not share in the ownership of the project.  As such, debt capital typically receives a fixed return of 3%-6% per year with no potential upside.

A multi-family real estate developer often uses both of these kinds of financing. 

5. Construction

After completing the initial stages of development and getting everything in line, a  real estate project is considered “shovel ready.” As it nears construction, there is more certainty related to how each step will unfold, for what cost and on what timeline. There are fewer risks at the construction stage, which is why investing in a commercial multi-family project at this later stage would not offer the same level of financial opportunity.

During construction, the developer must manage numerous contractors to keep things moving in order and on time. They will need to handle change orders for anything unexpected that occurs. If they have borrowed money, the developer submits requisitions to their lender in order to pay contractors monthly or upon certain project milestones.

Inspections will take place at predetermined intervals. The lender will make regular visits to monitor progress, and the city or municipality will need to inspect for safety, ADA compliance, and other factors. 

This stage may also include pre-leasing and hiring a property manager, in order to populate the building and start collecting rent as soon as possible. The final step in construction is the issuing of a certificate of occupancy, stating that the building is habitable. Short-term financing will sustain the building owner until it reaches a certain occupancy level known as “stabilization.” 

On completion of the multi-family building, the developer may manage it themselves or sell it to a new owner who will rent the units. The ultimate building owner will secure long-term financing and enjoy the project’s cash flows in perpetuity. This strategy is often referred to as “build-to-core.” 

Multi-Family Real Estate Development with Beach City Capital

Beach City Capital develops multi-family real estate projects only in prime markets, capitalizing on our strengths to maximize returns for our investors. We bring extensive expertise in architecture, design management, entitlements, development management, asset management, and investor relations. 

We have decades of experience in working with city staff in various municipalities within Los Angeles County. Our architecture training gives us a comparative advantage to manage our design consultants. We employ a strategic bidding process to select experienced general contractors in the industry, while minimizing construction costs. On-site construction management and scheduled owner-architect-contractor meetings ensure a smooth information exchange and a successful multi-family project.