Fulcrum recently conducted a market research campaign to better understand the Dos and Don’ts throughout the real estate and construction life cycle. This article covers certain tips learned from this market research during the Due Diligence stage. Additional Dos and Don’ts for the remaining stages of the real estate and construction life cycle will be forthcoming. Let’s take a look.
Do have a solid financial model.
As projects are measured by both internal and external partners on a financial basis, a solid financial model will not only assist in decision making, but also provide confidence to all stakeholders.
Do have an exit strategy if the deal falls through.
Remain objective throughout the process. If the metrics don’t work, be prepared to walk away.
Do have an understanding of the infrastructure abilities.
Unforeseen costs have a negative effect on net operating income and having to perform unanticipated upgrades to dry utilities, wet utilities, and traffic infrastructure is a quick way to experience unforeseen costs. Know what is serving the property, have an understanding of the capacities, and have an understanding of what burden the project may impart in the existing infrastructure.
Do engage jurisdictions early in the process.
Understanding what the entitlement and permitting process is, and what the jurisdiction’s expectations are, will assist in avoiding costly delays down the road.
Do have a solid understanding of the cost of construction – including recent historical cost data.
Compare similar project cost metrics to the proposed development. Having a cost comparison of 3-5 similar deals provides good information to make educated decisions.
Don’t do it alone.
Research shows leveraging internal and external resources to help “draw the road map” provides an insightful environment to make good decisions.
Don’t rely solely on the selling party or other advocates for the deal.
Similarly to the first Don’t, having a back-check on information helps identify possible missing/critical elements during the Due Diligence stage.
Don’t review the pre- and post-tax implications of development.
Real estate taxes may have a material effect on the net operating income of a project and the tax assessment for a property may change depending on the contemplated development.
Don’t rely on technical reporting provided solely by the seller.
Although the professionals may extend reliance on their technical reports to the buyer, the reporting is most likely dated and may not be reflective of the project the buyer contemplates. Therefore, retain your own technical consultants.