According to Plante Moran experts, being able to cover the initial cost of investing in a property development opportunity should not be the only consideration in determining whether a project is viable.
“Capital investment versus reward is one of the key factors, but before investing a lot in a project, you should also consider the strategic value of the opportunity, market dynamics favorable or unfavorable to the project, and deal-specific factors specific to the deal. According to the Plante Moran Real Estate Investment Advisors real estate development consultant’s recent blog,
Debt and equity can affect a company’s return on investment, so it’s important to balance risk and return, says Plante Moran.
Regarding questions to consider, they said:
- What is the amount and timing of the equity?
- What is your target return on equity?
- How does debt financing affect overall project revenue?
- What is the risk of debt pricing in this market?
- What other funding tools are available, such as opportunities for public-private partnerships and economic incentives (such as tax breaks)?
Investors should also determine whether the project supports their overall investment objectives, the authors say.
“Market analysis will reveal whether the property’s envisioned use is the best fit for the building and area,” they said.
When weighing risks, ask:
- Are there site-specific requirements that are expensive to develop?
- Are there opportunities to partner with other parties in a joint venture to unlock investment potential, share risk and improve outcomes?
Among other factors to consider, they wrote, it is important whether the project aligns with the investor’s mission and values.
Read the entire blog here.