It takes a collective effort to acquire, develop and construct a commercial real estate project from start to finish, and, as with all projects, a carefully constructed plan is essential to the project’s success.

While financing is only part of the overall transaction, there are a number of things that need to be completed or in process before a developer seeks financing on a project.

When approaching a lender the developer needs to provide specific information on the proposed project, information that the developer will most likely already have on hand. Providing this information at the onset will ensure the lender has what it needs to proceed quickly and efficiently.

The following outlines the type of information the lender will need in order to evaluate providing financing:

Project summary

The project summary is the lender’s introduction to the project, so it is important to include all of the relevant information. The first thing the lender needs to understand is the developer’s intentions on the project. This will assist in the structuring and underwriting of the transaction.

If the developer is looking to hold the property, the analysis will be based on the cash flow of the property (retail centers, office buildings, apartment buildings, etc.). However, should the developer decide to sell the property, the analysis will be based on the marketability/absorption of the units (residential subdivisions, home building, residential and office condominium projects).

Once the loan structure and intentions are clearly understood and in place, the second item to be included and outlined in the summary is the construction timetable. This will inform the lender when the developer needs to close on the parcel as well as begin and complete construction. In addition, it is important to include if there be any pre-leasing or pre-sales so there can be a review of any possible occupancy dates and comparable market rates.

Analysis of development team

Each project is different and has its own needs, which, in turn, dictates the type of development team that is needed for the project. However, regardless of the circumstances, the development team should consist of experienced individuals with a proven track record of completing similar projects.

The lender needs to understand who the team is and what each member will contribute to the project. Each member of the team has a specific purpose, such as entitlements, construction, and/or selling/leasing. If the developer has internal limitations, they should also be prepared to hire an attorney, general contractor and/or commercial broker to assist with the project.

Project cost analysis:

When developing land and/or constructing a structure, the lender needs to understand the costs associated with the project. The developer will provide a breakdown on the total costs to complete the project, including the land, entitlements, construction (broken out by purpose), soft costs, contingencies and interest. In order to determine the developer’s profitability on a project, the lender will compare the total project costs to the projected revenue, which leads to the next piece of information the lender will need.

Market analysis/feasibility analysis

With the construction costs complete, the feasibility analysis on the project is important in order to determine the length of time to sell or lease out a project. Based on the developer’s cash flow pro forma, it will determine the anticipated net profit on the project. When analyzing the pro forma, the lender will gather market information to determine if the projected price points or lease rates are supported in the proposed market. In addition to the pro forma, the developer needs to discuss its market strategy, including who is going to sell the property, the experience of the marketer and the market demographics.

During the underwriting process, the lender places heavy reliance on the market information, such as project demographics, market comparison, competition, lease rates, vacancies and cost analysis. When analyzing the information, the market information will provide an anticipated absorption rate to determine the length of time to complete the project.

Legal entity

Although not an initial underwriting factor, a legal entity will need to be formed and supporting information will need to be provided to the lender discussing ownership percentage, management responsibility and authorization. An attorney or tax accountant can provide the developer with the desired legal entity, such as a sole proprietor, corporation, limited partnership or limited liability company.

Again, the developer will have gathered all of this information when deciding whether or not to move forward with the project, the key is to gather and arrange it efficiently to present to the lender for review.

With an organized and comprehensive plan, the lender is in a better position to understand if the developer is an experienced professional. A good plan can be the difference between a successful or unsuccessful project.

Michael Schulte is a vice president, Commercial Real Estate at Harris for Aurora/Plano. He may be reached at 630-420-6943.