A Beginner Looking At A Community Food Hall Development
Hi,

I am completely new to the industry so if this is not allowed here please feel free to remove it. 

I am creating a partnership with 5 other individuals to pool capital and invest in real estate. We have not officially decided on an investment vehicle but the one we are currently working on would be a community food hall. It would be similar concept to this: https://studio-111.com/portfolio/detail/steelcraft-bellflower/

I have reached out to the studio that designed that facility and had an introductory conversation regarding the project, details cost estimates, etc. We have found 3 potential locations that are in areas with high disposable income, large tourist locations and college adjacent. 

We have around $250,000 cash to allocate to the project and estimates on construction/permitting/etc. from the architect are $200-250k for a facility similar to the one in the above link. Land is going to be in the $500-750k range.

Units will rent in the $4-5k and we should realistically be able to get 9 food/drink units and 3 creative office units.

I have a project management background with familiarity in construction and permitting and all 5 partners have experience in SFH real estate investment. 

My question is essentially: Can somebody with no experience in the industry take on a project like this? 

What would your advice be to someone looking to take this project on?

Again, if this is not appropriate feel free to remove. Any advice is greatly appreciated.

Thanks!
[{"id": "ha95cb0", "text": "First piece of advice is don\u2019t do it. \n\n2. If you\u2019re going if to do it, find an experienced operator to partner with. Someone who has lots of experience in the restaurant industry. \n\n3. Find an experienced broker. \n\n4. What are your entitlements going to cost. How much time will they take?\n\n5. Can you afford the carry costs of the above?\n\n6. Do understand the restaurant business?\n\n7. What lender will give you 75% LTC on a project like this? Do you have credit tenants lined up?\n\n8. Entitlements?? Neighborhood approval?\n\n9. Etc, etc etc. \n\n10. This is not as easy as laying down a bunch of shipping containers on a concrete pad. $250k might be your vertical cost, but what about off sites, underground, etc. \n\nYou have the idea. But that\u2019s step one. You have 99 more steps until completion.", "replies": [{"id": "ha974g6", "text": "Fantastic advice! Thank you for taking the time to write it out.\n\nIn regards to #6, what would be the typical terms a lender would want for a project like this?", "replies": [{"id": "haa5x5r", "text": "For ground up development 50-65% LTC. Rate would be around 8-12% on the low end given your experience and the fact its retail. Remenber lender here has to take construction risk. Granted I just did a spec hotel construction loan in a tertiary market for 5% but sponsor is a stud with 7 figure net worth and quite a few developments under their belt. \n\nAlso lenders will want recourse and you are going to need collectively as the borrower networth in excess of the loan amount + around 10% in liquidity outside the property and to maintain it for the life of the loan. 1% origination fee. \n\nYou should probably get the land entitled first with your equity partners then once entitled (which could take a very long time and you will have to pay fees on top of taxes in the interim) bring in an equity partner who knows what they are doing who can lend their reputation and pay for the development. Thats what I usually see but I am not a developer.", "replies": [{"id": "haayg3s", "text": "Great info! Really appreciate you writing it up. One of the pieces we are looking at is potentially RDA land and may be had on the cheaper end.\n\nEither way, your info provides a ton of perspective. Thanks!", "replies": [{"id": "hab60yp", "text": "Np. IDK what RDA is", "replies": [{"id": "haduhxl", "text": "Redevelopment area?", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ha9bjgw", "text": "To get those rents, you\u2019ll need to spend 250k on TI/LCs alone. Food hall build outs aren\u2019t cheap. \n\nYou\u2019ll need more cash. A lot more.", "replies": [{"id": "haaywge", "text": "That was the benefit of going with the container approach. Each container is $3500, and can be furnished as a kitchen for $15k with most work being done offsite. Then the containers are brought in and connected to the site. \n\nI can definitely see how the 250k may be for above ground/drop in costs and may not include the entitlements etc., though. I can definitely see the need for much more cash as well.", "replies": [], "depth": 2}], "depth": 1}, {"id": "ha9v80z", "text": "Your budget doesn't seem to have any basis in reality. I figure $50-75k for my approvals. Restaurant fitouts can easily be $175/ft. A hood alone is $20-25k. I'm finishing up a 16k sq ft mixed use building. Last unit left for rent is an 1800 sq ft restaurant end cap. Every experienced operator I have shown it too has said it will be $200k fit out minimum. I'm turning it over as vanilla box. \n\nI know you guys want to do a sexy project but they're expensive and very risky. First advise is don't invest with friends but if you insist, do something easier. You guys could buy a smaller medium density apartment building. B neighborhood with under market rents. Raise rents, renovate as units turn over. It will be slow and not very exciting to talk about at a dinner party but you'll build real wealth and not lose your nest egg.", "replies": [{"id": "hab0avo", "text": "That was the benefit of going with the container approach. Each container is $3500-4500, and can be furnished as a kitchen for $15k with most work being done offsite. Then the containers are brought in and connected to the site. Each unit is either a 40' for a food vendor or a 20' for a wine/beer vendor.\n\nI think your advice is correct, though. We'll have to look elsewhere at a less \"glamorous\" investment. I appreciate you taking the time to write up your experience!", "replies": [], "depth": 2}], "depth": 1}, {"id": "haa3szd", "text": "To answer your question, someone with no experience can get it done, but will need deep deep deep pockets and a lot of patience. Restarting vendors are completely different from SFH or office tenants and it\u2019s not going to be as easy as \u201crent is due on the 1st.\u201d Agreed on the others that your budget and expectations are off and you will need an experienced partner for planning, build out, and operations. \n\nI\u2019ve gone through similar projects twice, but usually  in the middle of construction.", "replies": [], "depth": 1}, {"id": "haa75cw", "text": "I'll point out a few items.  $250,000 is not enough for your build out.  Even a small fast casual food use (1500-2500sqft) costs $250k-$350k.  You are forgetting a few items:\n\n1. Water line.  What size is the supply line going into the building?  A food hall will require a very large water line.  Laundromats require anywhere from 1\" to 3\" water line.  This means excavation, etc.  Not cheap.\n2. Grease traps.  If you're dealing with food use, expect to install grease traps or similar devices for each unit/section within your hall.  Not cheap.\n3. Hoods.  Proper hoods with fire suppression systems are expensive.  Each unit/section will require this along with proper exhaust, etc.  Suppression systems are not cheap and expensive to install ($20k+ each).\n4. Is your use permitted by right or do you require a variance?  Is there enough parking or public transportation?\n5. Factor in vacancy.\n6. Factor in insurance cost (it will be high).\n7. Have at least six months of capital to carry costs.\n8. Factor in age of roof, mechanical systems, etc.\n9. Will the county require you to install/connect to a stormwater system?\n10. Assume upgrading all electrical in the building.\n11. Unless there is an existing sprinkler system, assume the county will require you to install one.\n12. SFH investment (residential) and commercial investment are apples and oranges.\n\nGL.", "replies": [{"id": "hab0n2q", "text": "A few of the items on the list would be handled by utilizing the modular/container units. These are $3500-4500 each and can be built out off-site as kitchens for around 15,000. \n\nIt looks like we have still under-budgeted for a project this size and either way do not have the capital to carry it out.\n\nI appreciate you taking the time to write out the list though! That's very valuable info.", "replies": [], "depth": 2}], "depth": 1}, {"id": "haa9jji", "text": "I am finishing a 6 stall food hall now. I can tell you that construction costs are about $250 per Sq ft not counting acquisition, soft costs, tenant allowance, commissions or soft costs. No site work. We started with an existing restaurant shell. Rents are more likely going to be 2-3k plus opex plus percent rent. I am doing it for the first time as well but own 26 other commercial assets (+/- $100m with over 150 tenants) and 4 successful restaurants. Being 60 days from opening, I can tell you that we are $500k over budget, 6 months behind schedule and the frenzy is that it's like we are opening 6 restaurants all at once. Luckily the deal can take the additional investment and time but i defenitely underestimated those thing and have a lot of experience in the business. Your cost side numbers seem light and rent model needs work but I would do it again. Good luck OP", "replies": [{"id": "haarfwv", "text": "This is realistic.", "replies": [], "depth": 2}, {"id": "haazj6z", "text": "This is fantastic info! I really appreciate you writing it out. \n\nThe area we're looking at his a high COL with a ton of disposable income moving in. We are close to Silicon Valley and getting many WFH transplants. We also get around 10X the population in tourist visitors each year. \n\nI can see that we are nowhere near the cash/liquidity we'd need for a project like this, though. Again, thanks for writing out your experience!", "replies": [], "depth": 2}], "depth": 1}, {"id": "haabraf", "text": "If you do this - I look forward to the post asking why this concept fails.", "replies": [], "depth": 1}, {"id": "haaumu8", "text": "I am going to generally suggest avoiding the hell out of this concept. Unless you have incredible alcohol sales, breaking even is extremely difficult in these setups because the real estate has to be damn near Trophy quality to get enough consumer traffic. I know for a fact that one of the largest and most famous food halls in Texas loses its ass every year. The owners only keep it because of the name recognition that it brings them. \n\nIf you want to go food space, pick something with a more controllable budget that is less reliant consumer traffic, like a commissary kitchen.", "replies": [], "depth": 1}, {"id": "had2ngz", "text": "Gonna be a very tough deal to pull off if you\u2019re brand new to the industry", "replies": [], "depth": 1}, {"id": "hadguio", "text": "Having so many food service tenants will be a massive headache and  costly.  A single operator operating different stalls will be easier but still costly.  As a LL, I don't want to contribute a lot of TI $ (only toward stuff that the next TT might be able to use).  Operator is going to have to come out of pocket for majority of the build out.  \n\nAlso, many operators (mostly their first time operating a food business let alone any business) underestimate construction cost &amp; timing only to scramble at the end to generate revenue asap and start off at a bad footing operationally/financially.  You will soon be stuck with build out(s) the next operator do not want to / cannot use and disturbs the existing food operators with demo/build out.  It's also difficult to put together the right mix of tenants that will generate traffic, let alone trying to get comfortable with their business plan (most won't have one, or will only be a menu).\n\nIf the weather in your area is nice, perhaps a food truck park may be a better option.  You rent out pads/services to the food trucks like mobile home parks.  Unplug bad food truck and plug in a new food truck as needed.  At least, with food trucks, the tenant mix is self selecting with lower risk to the LL. You supply covered pad area for dining/restroom facilities and maybe use a vacant pad or some other area for live entertainment.", "replies": [], "depth": 1}, {"id": "hbcffbc", "text": "I could get you a 3% rate construction loan with 85% LTC just reach out. I\u2019m a direct lender.", "replies": [], "depth": 1}]