New Construction Financing Failures – Market Feasibility Errors

Market Feasibility Study Flubs You Can Avoid

The new construction financing underwriting process for commercial real estate development transactions frequently face rejection due to fundamental errors in the construct of the market analysis and how the developer applies market intelligence.

It is often said the market feasibility studies are as much art as science. One thing is certain – they can be very controversial and lead to an underwriting rejection in a flash. Did you ever wonder why these things happen?

Market Feasibility Study Hot Buttons

The problem is that market feasibility studies are constructed based upon assumptions as to the demand potential, the market area size, the capture potential and the resulting findings – all of them can be a source of real problems as everyone has an opinion on these matters and the underwriter (or investor stroking the check) has the only opinion that matters. The most telling problem is a lack of testing of the assumptions and findings to determine if a reasonable basis may in fact exist for their use and incorporation into the resulting market study. This is done with a financial feasibility analysis test that utilizes the key assumptions and findings as inputs to see if the resulting yield to the sponsor is sufficient to warrant the deployment of at-risk capital. Most consultants don’t want to be bothered to do this testing or don’t know how to do the testing. This leaves the market study unsupported (or “naked”) and that means there can be arguments as to whether the study has any real basis in reality or not. While testing does not guarantee there will be no contention, it does provide a reasonable basis for defending the work. If your project doesn’t have a study, the study isn’t tested, or the study is incomplete, the odds are this could be a real source of future funding rejections. Get some help, demand better work and understand what the market study means in terms of how your project proposal’s development plan needs to be configured.

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