Preliminary Opportunity Assessment And Evaluation

On Dec 11, 2018 under Press Coverage

REIBC Input Magazine | Fall 2018
David R. Podmore, O.B.C.

The steps required to successfully conceive and execute a development project are essentially the same for commercial, residential, industrial and institutional properties. How does the process start? It starts with identification of an oppor-tunity, a vision for what may be possible for an identified property—the big idea!

Successful developers often have the ability to recognize an opportunity to accommodate housing, commercial, industrial, or institutional needs where others may not have the same creativity or commitment. They also do their homework—ensuring they understand the requirements of those that may be interested in purchasing, leasing, or renting the development product.

Successful developers pay a lot of attention to the requirements of not only their customers but the communities in which they develop, working closely with their neighbours, approving authorities, and special interests. In my opinion, the majority of developers in our communities are committed to improving the quality of the environment and life through their development activities; the incredible philanthropy and the significance of the development and construction industry’s contribution to the economy of our province and communities is most often not acknowledged or understood.

So let’s examine how development projects are conceived.

OPPORTUNITY AND SUITABILITY

Almost universally, these projects start with the identification of an opportunity for development of a property to a higher and best use in the community. This may be an opportunity for multi-family residential development, land subdivision for single-family homes or low- and medium-density residential uses, or commercial or industrial uses.

Prudent developers start with an assessment of the proposed development site to determine the suitability of the property for the intended uses, including an assessment of the proposed use to be accommodated under current zoning, or the likelihood of obtaining support for amended or change-of-use zoning to accommodate the intended use. This requires consultation with the relevant approving authority and, in most cases, the neighbours and broader community. In my experience, these consultations are best conducted by the developer directly so that the community gets to meet and know the developer without a “filter” of hired representatives, but this clearly depends on the capability of the developer to communicate directly with the community.

DUE DILIGENCE

In advance, or concurrently, the developer needs to undertake key due diligence to ascertain the suitability of the property for the intended development. This includes essential investigation of the physical and legal impediments or constraints that may exist (for example, site contamination, easements, registered restrictive covenants, rights of way, etc.). What is discovered may lead to further investigations or abandonment of the opportunity. For example, on most sites a Phase One environmental assessment (to identify potential for contaminants on site) should be undertaken. This may lead to a Phase Two assessment, the results of which may lead to the purchase of the property under consideration being abandoned, or it may significantly influence the terms of site acquisition.

In today’s evolving development world, three of the most difficult issues to address in the early exploratory due diligence phase of a development proposal are:

  • expectations of the approving authority for development and processing fees
  • community amenity contributions (extractions)
  • grossly extended approval times

These issues, combined with an extraordinary escalation in construction costs, make projections of future performance on development projects very difficult to reasonably forecast.

Add to this the uncertainty regarding the direction of interest rates and the threatened trade tariffs affecting many of the essential material costs for the construction and development industry and you realize the importance of very disciplined due diligence and a cautious approach.

PRODUCT AND PROGRAM

Informed knowledge of the demographics of the community in which the development is proposed is key to determining the characteristics of the product that should be contemplated. This applies to all product types, especially residential condominium, multi-family rental, retail, office, and seniors’ living.

An extra effort should be made to assemble as much information from the realty community, existing developments and properties, government agencies, other developers, specialized research groups, and others who could guide the fine-tuning of the target market and refine the definitive program (unit features, amenities, services, etc.) for the proposed development.

PRO FORMA

All of these considerations and intelligence lead to the assembly of a project pro forma to ascertain the feasibility of a given development project and to test project sensitivity to various changes in construction costs, municipal fees and CACs, timing, interest rates, sales or rental rates, and more. A very disciplined pro forma projection with adequate contingencies, supported by solid research and pragmatic assessment of current and responsibly forecast future conditions, is essential to successful development initiatives.

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