According to the experts at Plante Moran, being able to cover the initial costs of an investment in a real estate development opportunity should not be the only consideration in determining whether a project is feasible.

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

Debt and equity can affect a company’s return on investment, so it’s important to balance risk against 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 return of the project?
  • What is the pricing risk of debt in this market?
  • What other tools are available for funding, such as public-private partnership opportunities or economic incentives (such as tax allowances)?

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

“The market analysis will discover whether the intended use for the property is the best fit for the building and the area,” they said.

When weighing the risks, the authors said, ask:

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

Other factors to consider include whether the project aligns with the investor’s mission and values, they wrote.

Read the whole blog here.