In Part 1, we pointed that the fundamental component to a successful development is money. In Part 2, we demonstrated that the single most important factor to the lender and the investor is the belief they will get paid back. The most reliable way to prove to investors that they will get paid back is to attract rent paying tenants to the project. The tenant is the most valuable asset in any commercial real estate development project. The tenant is the person or entity that will enter into a long-term agreement to pay rent, rent creates cash flow and cash flow help lenders and investors form a reasonable belief they will get paid back. Of course, investors also want to see tenants with long history of success, solid financials, well established brand and willing to sign a long term lease agreement. The lease agreement is probably the most important document a developer can produce. However, getting a tenant to sign a long term lease is not that easy. Remember the building(s) is not yet built and probably will not be for a couple of years.
So how does a developer find these coveted tenants and get them to sign a legally binding contract to pay them rent in a building that doesn’t exist yet? Often, the fundamental component to attracting prospective tenants to a development project is location, what this author refers to as the where principle. The generally accepted mantra for putting a real estate project on the right track for success is location, location, location. Pick up any article about real estate, look at any Web site, or watch any show on television today and you will find that most real estate decisions are based on location. Location is probably the single most important factor for attracting and retaining tenants, especially, desirable, financially stable tenants.
However, location is relevant to what you are planning to develop and whom you are developing the project for. As the developer, site selection or location should help you focus on the key benefits to the tenant. Application of the where principle to a prospective site will result in a detailed analysis of the market that surrounds, encompasses and makes up the development area. The surrounding demographic information and comparable, competitive project data should strongly support the new project and the intended use. Finally, it should strongly demonstrate to the tenant how the proposed site will be important to the success of the tenant’s trade or business. Focus on the location and the location information most important to the tenant and getting them to sign a long term lease agreement will be much easier.
We will examine the where principle in more detail and all of the five basic principles to developing commercial real estate and how these simple principles will demonstrate how to buy the land, build the building, attract tenants, be a landlord and buy or sell a commercial real estate project.