How do I perform due diligence for investing in a real estate development project?
A real estate developer showed me a couple of the projects he's working on. They seemed like good investments. 10% a year for the first 5 years + 20% IRR. What sort of due diligence can I perform? I want to make sure he doesn't just steal my money and never does the project.
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Biggest risks of any real estate development deal are tenants and entitlements. It's great if he says he will build XYZ but can he atually do so and will there be ppl to fill it.
Also I'd look into his financing structure.
Do your own research to confirm the project's feasibility. As mentioned above, make sure the land is entitled or could likely be entitled for the type of project he's proposing. Make sure there's market demand for the product being built. Make sure the lease rates, development costs, etc are all achievable and backed up with market comps. As far as stealing your money, use a good attorney to review/draft the legal documents. You shouldn't just release all your equity blindly. There should be draws which specify where the money is being spent. Typically the developer spends his portion of the capital stack first, then the equity partners, then the debt. Also look into the developer's track record and make an assessment if you're comfortable giving him your money. Good luck!
My developer's had 3 other projects. One of which he sold and claimed to nearly double investor's money after 2 years. How can verify how his current completed projects are doing compared to projections? Ask him for financials?
I imagine the time/date stamped original underwriting materials (he could forward you an email from 2 years ago that stamps the date/time which should match the stamped date time for the excel sheet -- these guys are always forwarding these models to lenders and investors and it would not be a stretch to provide if he wanted. Redacting the 3rd parties is fine) for the project versus the current financials (tenants RR, sales confirmations etc), Juxtapose those and it should give you some idea how well his work aligned with his projections.
If this kind of DD become a critical part of your career, I would suggest reading this book given how it outlines the mindset and methodology as well as what is reasonable to request and investigate when approaching CRE deals:
https://www.amazon.com/Diligence-Handbook-Commercial-Real-Estate/dp/151…
Most important thing to me is where you are in the market cycle and where the project's completion will be in the market cycle. You could have something proformas great and the underlying premise of the deal could make sense but the project gets whacked by macroeconomic headwinds. Conversely, if you are in the right point in the cycle it becomes that much easier to make money.
I don't know what you are looking at in Boston, but for example if someone came to me and said they wanted to buy raw land in downtown Los Angeles and build a 100 story tower, that very long lead time of several years would be much more risky considering how much money is plowing into or has already planted itself downtown than say a value add deal that could be completed and leased up within a year.
Market timing aside, check their track record. Ask for financials for past deals and investigate past projects. If that checks out, dig into the assumptions of the proposed project. Verify that CAPEX, financing, market projections, etc seem right.
Compare the deal to others on the market that are of a similar type.
...rather difficult to predict market cycles, however, much less model them in due diligence.
Yep it isn't easy but you can't ignore it either. Lotta stuff you can utilize - availability of debt, type of developers active, type of projects, rate of increase in construction costs, sentiment, etc.
Work smarter, not harder...
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