Walking the Tightrope: How to Build Maximum Safety into a Development Deal

Being a multifamily developer is akin to being a tightrope walker. You can take every precaution available, however you didn’t exactly choose the most stable line of work. Cashflow is years away, construction costs are volatile, interest rates are unpredictable, and regulatory hurdles seem to change overnight. But here's the thing – while you can't eliminate risk entirely, you can absolutely minimize the risks that are controllable. Today, we're breaking down exactly how to do that.

Financing: Fixed Rate Debt

Your financing structure is your first line of defense against market volatility. Yes, securing 5-year fixed-rate debt for new construction is significantly harder than getting floating-rate financing – banks prefer to push interest rate risk onto developers. But the past few years have made the case clear: those who gambled on floating debt are feeling pain.

Equally important: choose your lender as carefully as you choose your site. An inexperienced lender can turn a good deal into a nightmare through poor communication, unrealistic expectations, or inflexible terms when market conditions shift.

Look for institutions with:

• Strong balance sheets and conservative lending practices

• Experience in your specific market and asset class

• A track record of working with borrowers during market downturns

Location Strategy: Consider all the Variables

Your site selection can make or break your project before you even break ground. Start by choosing markets with strong housing needs – places where demographics, job growth, and rental demand create a natural tailwind for your project.

Next, pick sites with low regulatory hurdles. This means avoiding areas with:

• Complex zoning requirements or frequent code changes

• Lengthy approval processes

• Activist communities that regularly challenge development

• Environmental complications that could delay or derail your project

Also critical: choose markets without weather issues. Hurricane zones, earthquake regions, and areas prone to flooding add layers of risk and insurance costs that can kill your returns.

Construction: Locking in Certainty

Construction cost overruns can turn a profitable project into a disaster. Protect yourself with fixed-price construction contracts that transfer cost risk to your general contractor. Yes, you'll pay a premium for this certainty, but it's worth every penny when material costs spike or labor becomes scarce.

Structure your contracts with:

• Clear scope definitions and change order procedures

• Performance bonds and payment guarantees

• Liquidated damages for delays

• Contingency funds for unforeseen conditions

Scale Strategically: Build in Phases

Large projects might seem more efficient, but they're also more dangerous. Break up large projects into phases whenever possible. This approach offers multiple advantages:

• Reduced capital requirements per phase

• Ability to test market absorption before committing to additional phases

• Flexibility to adjust unit mix and pricing based on initial lease-up

• Lower risk if market conditions change mid-project

You can always build the next phase if the first one succeeds, but you can't un-build if the market turns south.

Request Incentives: TIF or Tax Abatement

A development project that includes TIF (Tax Increment Financing) or, similarly, tax abatement, receives a boost in cash flow in the critical early years. Should issues crop up, such as the project missing on rent projections, the TIF income can keep the property cash flow positive until things improve.

Work with local economic development authorities early in your planning process. They want successful projects in their communities and are often willing to structure incentive packages.

Underwriting: Strong Performing Deals Only

Finally, the most important risk management tool: only take on projects with strong projected returns. In today's environment, your base case returns should be compelling enough that even if things go moderately wrong, you still make money.

This means:

• Conservative rent growth assumptions

• Realistic expense projections

• Stress-testing your pro forma against various scenarios

• Maintaining healthy profit margins that can absorb unexpected costs

If a deal only works with aggressive assumptions, it's not a deal worth doing.

Conclusion

The multifamily development game isn't about eliminating risk – it's about stacking the odds in your favor as much as possible. Every choice you make, from your financing structure to your site selection, either adds to or subtracts from your margin of safety.

Focus on building a fortress: conservative underwriting, experienced partners, and deals that work even when things don't go according to plan. In an industry where fortunes are made and lost on the details, your commitment to controlling what you can control will be the difference between surviving market cycles and thriving through them.

-Ben Michel

Ben Michel is the founder of Ridgeview Property Group, an investment firm specializing in multifamily real estate. Register Here to be notified of available investment opportunities.