Successfully tackling a new ground-up construction project can be a daunting endeavor for even the most experienced real estate investors. There are a ton of moving parts and plenty of mistakes to be made if you are not adequately prepared. No matter the scale or nature of your planned ground-up construction project, it pays to do your homework beforehand so you can anticipate the major challenges you will face and have a plan to navigate them efficiently.
To help you get started on the right foot, the experts at Express Capital Financing have compiled the five most common missteps investors make when it comes to ground-up (or new) construction and how you can easily circumvent them to keep your project on budget and on time.
As the name implies, ground-up construction means that real estate developers start with a blank canvas and build an entirely new structure from scratch on a vacant piece of land. A key benefit of the ground-up process is that you have almost unlimited flexibility when it comes to flexing your creative side—the only limits being your budget and timeline. With buyer demand at an all-time high, ground-up construction projects are a profitable investment endeavor for the future with the potential to yield above-average returns on investment.
Customization: Ground-up construction allows for complete customization according to the specific needs and preferences of the owner or developer. Starting with a blank slate means that everything from the layout and design to the materials used can be tailored to meet the project’s requirements.
Optimized Efficiency: With ground-up construction, developers have the opportunity to incorporate the latest construction technologies and sustainable practices, resulting in a more efficient and environmentally friendly building. This can lead to lower operating costs over the long term.
Greater Control: Creating a structure from scratch provides greater control over every aspect of the project, including budgeting, scheduling, and quality control. Developers can ensure that the project adheres to their vision and standards without having to work within the constraints of an existing structure.
Long-Term Value: A newly constructed building typically requires less maintenance and repairs compared to older structures, leading to reduced ongoing expenses and potentially higher property values over time. Additionally, modern amenities and features can attract tenants or buyers, enhancing the property’s value.
Compliance with Building Permits: Building from scratch allows for full compliance with current building codes and regulations, ensuring that the structure meets safety standards and legal requirements. This reduces the risk of costly retrofits or fines down the line.
Enhanced Sustainability: A ground-up development provides an opportunity to implement sustainable building practices from the outset, such as energy-efficient design, renewable energy systems, and water-saving features. This not only reduces environmental impact but also lowers utility costs and enhances the building’s marketability. Improved Functionality: By designing a building from the ground up, developers can optimize the layout and functionality to best serve the intended use of the space. This can result in more efficient workflows, better utilization of space, and enhanced user experience.
Brand Image and Identity: For businesses, ground-up construction offers the chance to create a custom-built facility that reflects their brand image and identity. This can help differentiate them from competitors and create a unique presence in the market. Overall, while ground-up construction projects may require more time and resources upfront compared to renovations, the benefits in terms of customization, efficiency, control, and long-term value can make them a highly attractive option for developers and property owners
Choosing the Wrong Location: The location of your ground-up construction project is arguably the single most influential factor in determining its overall profitability. Building in a location with too little demand could make it challenging to effectively market the finished product. The longer the completed build sits vacant, the more it eats into your profit margin. To avoid any issues, research the surrounding area and the state of the local economy. Look for areas with solid employment prospects and in-demand amenities such as shopping and restaurants.
Overlooking Administrative Steps: Certain localities impose stringent building codes and zoning mandates that dictate what type of buildings can be constructed in certain areas. For instance, there may be limitations on height, number of units, color and more that could throw a wrench in your planned build. Always be sure to be up-to-date on any such requirements and obtain all necessary permits and licenses before breaking ground in order to avoid costly delays and monetary penalties.
Inaccurately Estimating Expenses: The harsh reality of the construction industry is that almost no project goes exactly according to plan. One of the most common mistakes investors make is failing to build in a contingency budget to take care of any problems that may pop up over the course of the project. Certain costs are variable and thus hard to predict, such as labor costs and materials, especially in an industry that is still working out pandemic-related supply chain issues.
Setting an Unrealistic Timeline: Investors need to have a solid grasp on all phases of the construction process and the time allotted to each. This is crucial for coordinating contractors and keeping the build on track. Note that delays are likely to happen due to a multitude of factors, whether that be delivery lags, labor shortages, etc. Just like your budget, you need to factor in some wiggle room in your planning to accommodate for these complications.
Not Maintaining Open Lines of Communication: All stakeholders involved in the ground-up construction process need to be on the same page during all stages of the build in order to avoid potentially costly miscommunications. Be sure to conduct regular check-ins with all contractors, lenders and colleagues so there are no gaps in communication that can lead to trouble down the road.
There are several options available for financing a ground-up construction project. One option is to fund the project out of pocket until a certain level of confidence is reached, at which point a short-term ground-up construction loan can be obtained. This loan is paid out in draws during the construction process, with incremental draws distributed after specific construction milestones are achieved.
For operating companies, most expenses can be wrapped up into the overall loan, making it easier to finance the project. Additionally, investors may consider securing a bridge loan until the project is stabilized with certain occupancy thresholds. Once the property is stabilized, the bridge loan can be replaced with long-term financing.
Another construction financing option is to consider a joint venture arrangement or real estate syndication. These partnerships can help bridge the financing gap and provide additional support for the project. Equity investors should be prepared for a lack of near-term cash flow and may need to bring at least 50% or more equity to the project, especially for speculative projects.
Overall, there are various financing options available for ground-up construction projects, and it’s essential to carefully consider each option to determine the best fit for your specific project and financial goals.
When it comes to tackling new construction projects, having the right financing partner by your side can make all the difference. That’s where ACOM Capital Financing comes in. Our specialized ground-up construction loans are designed to provide you with the funding you need to bring your vision to life. With competitive rates, flexible terms, and a streamlined application process, we make financing your project as convenient as possible. Take the stress out of your next new construction project and partner with Express Capital Financing. Contact us today to learn more about our specialized ground-up construction loans.
Follow us at ACOM Capital
Follow us on social media
Welcome to Acom Capital, your gateway to tailored financing solutions for Investment Residential and Commercial Real Estate.
Copyright © 2024 Acom Capital. All Rights Reserved.
