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

Preleasing

Let us assume that you have completed your due diligence sufficient to conclude that you wish to pursue the project. The site does not have soil issues, the title is clean, and the survey does not reflect any problems with easements, encroachments, or similar matters. You have consulted with an architect and possibly an engineer and have verified what you can build corresponds with what you want to construct. Also, market research has shown that $2.23 per square foot per month is achievable, that there is a strong demand for medical office space, and that the geographic area where the property is located is not “thin,” that is, there is a strong demand for medical services and there are several competitive medical buildings and therefore many doctors in the trade area to compete for the available rentable space. Should you start building?

Most commercial projects require some level of preleasing before a construction project should be started. The level of required preleasing is a function of the developer's comfort level, the requirements of his lender and, possibly, based upon input from investors. There is no right answer as to what the proper level of preleasing should be. Should the rents to be generated from the preleased tenants be at least sufficient to cover (1) operating expenses, or (2) operating expenses and the principal and interest obligations, or (3) operating expenses, principal and interest obligations, and a sufficient amount to pay a reasonable return ...