Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Feasibility or Market Study

The problem with the preceding analysis is its simplicity. We assumed a build-to-suit scenario. We assumed we had the building 100 percent preleased prior to the start of construction. Based on our construction costs, we determined what the tenant had to pay as rent in order for us to achieve a 12 percent return on total costs. In this hypothetical example, we can go to the tenant and inquire if $2.23 per square foot per month triple net is an acceptable rent level and, if so, we could possibly finalize a lease on that basis. The problem is in the real world things are usually not so simple. Most of the time at least part of a project is built without knowing who the eventual tenant or tenants will be. Based on the nature of development, it is rare that all of the pieces are in place at commencement of construction. There is a level of preleasing that is necessary to get the project off the ground, but usually 100 percent of the project is not preleased. Additionally, if tenants commit to space up front, often maximum rents cannot be achieved. If a tenant is committing to lease space significantly in advance of the finished product, it usually can negotiate a discount in rent as compared to what the market rent will be once the project is fully built-out. In our example, we knew who the tenant would be, so we would potentially be able to negotiate a rate of $2.23 per square foot per month prior to commencement of construction. Notwithstanding the above, ...