Usually articles written in trade publications give you tips on how to develop an apartment project, not reasons why you shouldn’t build one. If everyone started the development process by looking for reasons why a project might not succeed, the industry might have fewer problem properties.

This article is going to provide a different perspective from a developer who has written more than his share of checks to support bad projects since the early days of his development career. The reasons aren’t listed in any particular order.

1. High capture rate: A capture rate is very simply the percentage of eligible renters within a market area to whom a developer must rent to fill his project.

If a project consists of 100 units and there are 2,000 eligible renters within a reasonable radius of the property, the capture rate would be 5%. Don’t expand the market area to include the entire county – people don’t generally want to drive that far to go to work. And remember we’re talking about eligible renters, not the eligible population that includes homeowners. If you need a capture rate higher than 5%, begin paying attention. Above 10%, you are in dangerous territory.

2. Shrinking population base: What is the population trend in a particular market? If it’s in decline, what’s the reason?

Declining population is a warning signal you should take seriously because, over time, it could result in an increasingly high capture rate. This means that your project would need to capture a higher percentage of eligible renters than when you completed your initial lease-up. There are usually solid reasons why a community is losing population, and they’re rarely good.

3. Deferred developer fee: If I had a fraction of the developer fees that were deferred on early projects with which I was involved, I’d be a wealthy man.

For the most part, we didn’t go into our early deals with the intent to defer developer fees. It just happened as a result of a number of miscalculations that we made.

However, there are developers who are willing to defer a significant portion of their fee to make their projects financially viable, expecting to earn their fee through an increased portion of the cash flow. This is a crazy strategy. Deferring more than 15% to 20% of the developer fee is an indication that the project isn’t viable. Don’t build it if you aren’t going to be paid for it!

4. Poor location: We’re talking Real Estate 101 here. I can’t tell you how many properties have flunked the “location, location, location” test.

We are the replacement general partner for a property in a small Midwestern town. The property is on the back side of a high-end

single-family subdivision and at the end of the block as well. Drive-by rental traffic is nonexistent. No one looking for rental housing would ever make it to this property because they wouldn’t imagine that apartments would be located in such an upscale neighborhood. If your property doesn’t have good visibility and reasonable access – don’t build it.

5. Unreasonable real estate tax structure: No one likes to fight with the tax man. Unfortunately, a lot of county assessors think that apartment owners are “fat cats” and should be taxed to the hilt. They want to assess values at absurd levels, meaning you’d be paying higher property taxes.

Make certain that you do your homework on the local tax situation. Are you going to have to appeal your valuation every year or two because the assessor thinks your apartment complex is the Taj Mahal? The time, effort and money spent appealing property tax valuations are considerable.

If you honestly don’t think you’ll get a fair shake with this substantial operating-cost line item, build your project somewhere else.

6. Significant lower-priced competition: Many developers overlook nontraditional competition in markets in which they are building. They take a superficial look at other apartment communities and assume that those properties represent the market.

What about duplexes and single-family home rentals? I’ve seen many markets where “mom-and-pop” duplexes and single-family rentals were much more significant competition than other apartment complexes. While many of the duplexes and single-family homes were of inferior quality, the rental rates were so much lower that people looking for rental housing could not pass them up.

If you determine that your all-inclusive competition leases at rates much lower than yours, and there is any hint of vacancy in these competing properties – don’t build your project!

7. Lack of community support: Unfortunately the NIMBY (Not In My Back Yard) zealots are out in force across the country. These people are against any kind of development near their neighborhoods. They’ll fight tooth and nail to keep rental housing at bay.

We have now adopted a policy whereby we simply won’t build a project in a municipality that doesn’t welcome us with open arms. It’s just not worth the hassle.

8. Insufficient safety margins: Smart developers understand that nothing ever goes according to plan. Smarter developers understand that nothing ever goes according to plan and the things that don’t are rarely good. The smartest and richest developers always create various margins of safety to offset the problems that are guaranteed to occur (and cost money).

Will the project still work if rents must be $50 less than pro forma? How much money can you allocate initially to operating reserves? Are there sources of funds in the capital structure for cost overruns? If you can’t identify multiple margins of safety – don’t build your project!

9. Highly volatile local economy: Too many developers don’t look for potential volatility in the local economies in which they are locating projects.

A town may be growing at a rapid pace with a clear need for more rental housing. But on what foundation is the local economy based? Is there a primary industry or institution (such as a military base) on which the town is totally dependent? What happens if the military base closes or the major employer that dominates the market suddenly closes its operation and outsources the work to a foreign country? Is there a historical pattern that can be identified? If a dominant employer is in a highly cyclical industry, what will happen to the apartment market when that employer lays off several hundred workers?

If you can’t be comfortable that the local economy is adequately diversified and insulated from wild swings in employment – don’t build your project in that market!

There are many good reasons to develop (or acquire and renovate) apartment communities.

But if you want to survive and prosper in this business, you need to take off the rose-colored glasses and look at what you are doing with a great deal of skepticism and caution. If you can do that, the chances are good that you will enter the smartest and richest developers’ hall of fame.

R. Lee Harris, CRE, CPM, is president of Cohen-Esrey Real Estate Services, Inc., a Kansas City-based commercial real estate organization that has managed more than 48,000 multifamily units and 26 million square feet of commercial space since 1969. The firm is active in 95 markets spanning 17 states and is actively involved in the development and acquisition of apartment communities. The company’s Web site address is