house made of money

Being able to cover the upfront costs of investing in a real estate development opportunity shouldn’t be the only consideration in determining whether a project is feasible, according to experts at Plante Moran.

“Capital investment versus reward is one important factor, but before you invest too much into the project, you should also assess the strategic value of the opportunity, market dynamics that can help or hurt the project, and deal-specific factors that are unique to the opportunity you have in front of you,” according to a recent blog from real estate development consultants at Plante Moran Real Estate Investment Advisors.

Debt and equity can affect a company’s return on investment, so it is important to balance the risks against the returns, Plante Moran said.

Questions to consider, they said:

  • What is the amount and timing of equity?
  • What are the targeted financial returns on equity?
  • How does debt financing affect the overall project returns?
  • What’s the risk of debt pricing in this market?
  • What other tools are available for financing, such as opportunities for public-private partnerships or economic incentives (such as tax abatements)?

Investors also should determine whether the project supports their overall investment goals, the authors said.

“Market analysis will uncover whether the use envisioned for the property is the best fit for the building and area,” they said.

When weighing risks, the authors said, ask:

  • Are there site-specific conditions that could be costly to the development?
  • Are there opportunities to partner with other parties in a joint venture to unlock investment potential, share risk or improve outcomes?

Among other factors to consider is whether the project aligns with the investor’s mission and values, they wrote.

Read the whole blog here.