Is there any version of ground-up commercial that starts under a million?

Question

A broker sent me a pad site listing, 0.9 acres in front of a grocery anchor, asking $410k, zoned for retail. His email said "ideal for an owner-user or small developer." Every article I read about commercial development talks about $50M projects and institutional equity, so I assumed the whole category was closed to someone at my size. But a pad site with a 2,500 foot building in front of a grocery store doesn't sound institutional at all. Is the small end real, or is that pad site actually only buildable by a franchise operator with a corporate balance sheet behind them? I'd rather find out now than spend six months learning I was never a candidate.

Rena Guide · Accepted Answer

The small end is real. It's just tighter than the listing email suggests.

Take your pad. Land $410k. A 2,500 foot single-tenant shell at, say, $300 a foot is around $750k of hard cost, and site work on a pad often adds $150k to $250k because you're paying for the drive aisle, utilities, and drainage even on a small building. Soft costs (design, survey, geotech, permits, legal, loan fees) usually land somewhere around 15 to 25 percent of hard cost. So you're modeling a $1.5M to $2M project, not a $50M one.

Construction lenders size to cost rather than to a purchase price, and 60 to 65 percent loan to cost is a common bank range for a small commercial build. That leaves $600k to $800k of equity. Get the actual sizing, rate, and reserve requirements in writing from a lender before you build any model, because those terms move around.

There are two smaller doors. You can invest as a limited partner in a development fund or a single-asset deal, where minimum checks often start near $50k to $100k, and you have no control. Or you contribute land into a joint venture and let a sponsor develop it.

One thing the equity number hides. On a deal that size the bank will almost certainly want a personal guarantee plus a completion guarantee, meaning you personally finish the building out of pocket if costs run past the budget. That guarantee is the real gate at the small end. Plenty of people have the $700k and still can't get the loan, because there's no balance sheet standing behind the promise to finish.

jessreyes12 · Answer

Is the completion guarantee capped at anything? I always assumed a guarantee had a number attached to it. If it just says "finish the building," and the steel bid comes back $200k over, that's an open-ended personal obligation on a $1.8M project. Does anyone actually negotiate a dollar cap on those, or is that a thing only sponsors with a track record get?

hannah_west29 · Answer

Run quill's pad as numbers. Total cost $1.9M. A QSR ground lease or small shell at $45/sf NNN on 2,500 feet is $112k, and you'd underwrite maybe $105k after credit loss and non-reimbursed items. That's a 5.5 percent yield on cost. If pads like that trade at a 6 cap you're worth $1.75M and you built for $1.9M. You need rent closer to $55 or cost closer to $1.6M before it works, and I don't see how the site work gets cheaper. Tell me which of those inputs I have wrong, because as written it's a negative-margin project.

luis_carrera · Answer

@ledger that's roughly where my spreadsheet lands too, and it's why I stopped modeling pads. The rent number is doing all the work and it isn't mine to set, the anchor's co-tenancy and the national tenant's rent committee set it.

megan_doyle15 · Answer

What exactly is a pad site? Is it just the empty corner of a shopping center parking lot that gets sold off separately?

renee_dubois · Answer

@rigging basically yes, an outparcel carved off the anchor's parcel, usually with shared access and a reciprocal easement agreement you have to read closely.

What strikes me coming from small multifamily is the guarantee point. On a fourplex the lender's worst case is they take the building. Here the lender's worst case is a half-built shell with no value at all, so they push that risk onto a person. That's a different kind of exposure than I'm used to and I don't think the equity check is the part I'd struggle with.

aliyah_b · Answer

Before you get to any of that you're paying for a survey, geotech, civil, and the municipal application fees, and on a small pad that stack ran higher than I expected when I priced it out. Call it $40k to $60k of money spent before you know whether the site plan even gets approved. On a $1.9M project that's real.

joe_delgado5 · Answer

The line nobody put in yet is the construction loan term. They'll write it for 12 or 18 months, interest only out of a reserve, and if the CO slips you're paying an extension fee and possibly re-underwriting into a worse rate. I've watched that timeline slip on much simpler jobs than a pad with an anchor's approval rights over the site plan. Thin margin plus a fixed clock is how people lose the equity.

Is there any version of ground-up commercial that starts under a million?

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