The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.
The type of due diligence questions an investor should ask really depends on whether they’re looking at a development deal or a straight up investment deal. For a development deal, one may want to know if the developer has worked with a particular asset class before, whether they have knowledge in a particular market, or if they’re experienced enough to get the project done. Attorneys for the investor can draft up a checklist to present to developers filled with all of the due diligence questions they’d like to have answers for.
What is a great commercial real estate due diligence question for an investor to always ask? Wow, you ask a good question here, Richard. Depends on whether it’s a development deal or just a straight investment deal. The most important thing on a development deal that I would ask is does the developer have a track record, have they developed this asset class before, do they have knowledge in the market, are they experienced and will they be able to get this done, will they have the right financing, do they have the right zoning, are all the entitlements in place? To me, the biggest question is, as a developer, is the land fully entitled and what are the sort of unseen risks that should be evaluated? And really the cool part is that a title attorney, or really an attorney of any kind, that you as the investor hire to represent you can always ask the developer for evidence of the correct entitlements actually being all in place. So it’s very common when CA South gets institutional investors looking at a deal, that their attorney sends a long checklist of different due diligence items that they want in order to see proof that yes this piece of land has been in fact rezoned from agricultural to industrial land, and yes you are allowed to build 140,00 square feet of industrial product on this 15 minutes outside of Nashville, and yes there are no issues with streams or easements meaning rights of way for electricity access or various other things. And so the best piece of advice I could give you is if you’re putting a meaningful amount of money to work behind a developer it’s very reasonable and standard for you to give them a due diligence checklist specifically regarding the entitlements. Because that’s where there’s a lot of risk, and if things go wrong there, it’s way worse than a little bit of cost overrun on a project or something. Because it could be the difference between not being able to build on something that maybe you already own. So, that’s my best piece of advice.