Property Development – Feasibility Studies

A feasibility study is performed at many stages of development in order to analyze and determine whether the project is financially and environmentally worth developing. In the beginning the numbers are very general and conservative. By the time the project starts construction, the numbers should be quite accurate.

Usually a developer will conduct his first feasibility study after he has tied up the contract through a purchase and sale agreement or an option to buy. The study researches whether there is a demand for the proposed development project and present and future competition. A lot of the information can be obtained from local planning authorities. Based upon the results, if the demand projection indicates there is a higher demand than what is currently available, then the developer assumes the project will be successful and should proceed with the development.

Most feasibility studies take into consideration needs legal issues, technical issues, financial and economic concerns and benefits and cultural needs.

Property Due Diligence:

Once the developer has decided to move forward with the project, his engineer or architect will draw preliminary plans and specifications for the development. This would include the layout of the project, buildings, utilities, and other site work. The engineer along with the developer if he prefers would then meet with local zoning and planning authorities to determine if the site complies with local zoning ordinances or whether zoning changes will be needed. Zoning compliance is extremely crucial to the development process and should be reviewed and analyzed in the very beginning of the development process. If during this property due diligence period any major hurdles or concerns come up a new feasibility study should be immediately performed to determine if the project should move forward.

An engineer’s cost estimate for the site work along with an architect’s cost estimate for the building are prepared during the property due diligence period. The developer will take these cost projections and create a cash flow analysis of the project based on the timing of permitting, construction, and finally occupancy. The cash flow analysis is part of a much more detailed feasibility study created at this time.

Bank Approval and Financing:

The developer will then obtain a development mortgage loan financing commitment once the initial plans and specifications are completed and a fairly accurate cost for the project has been estimated. The lender will usually request a copy of the preliminary market feasibility study, proposed project description, financial statements and any information about other projects the developer has developed. Development loans customarily provide funds to pay for the purchasing the site, permitting costs and construction costs.

Final Property Feasibility Study:

After permits have been awarded for the project but prior to actual construction beginning, it is in the best interest of the developer to conduct one last feasibility analysis of the project. The development costs should be quite solid and need very little revision. It is the market and demand for such a project that most needs to be checked at this point. It can often be a long time between the first feasibility study and this one and economics and demographics can change.