Large Developments - Key Indicators for Success (or Failure!)

[Jim Froehlich]

Experienced developers (or underwriters) of large multi-units or commercial deals:  What do you think are the most important factors when analyzing deals that are close to execution (i.e. past entitlement phase)?  I've been vetting deals lately for private equity consideration and notice the due diligence files number between 150-250 (many legal, accounting, civil engineering).  Beyond credentials of the developer and great market research, what do experienced people think are the key variables to look at for whether a deal is likely to perform as predicted?  Most likely red flags? What have you missed in the past that came back to hurt? What things hurt your performance that were unpredictable? 

[Jay Hinrichs]

Originally posted by @Greg Dickerson:

Originally posted by @Jay Hinrichs:

Originally posted by @Greg Dickerson:

Originally posted by @Jim Froehlich:

@Greg Dickerson, thanks for the great feedback!  I am definitely intrigued with the idea of "running stress tests and scenario tests".  I can say that I notice experienced sponsors and investors seem to fret much less when the developers/partners coming to table have strong track record of success in the asset class and geography

Yes you want a developer with multiple successful exists not just projects in the pipeline. There’s no replacement for experience. 

Knowing what not to do is way more valuable than knowing what to do and the most dangerous thing is to know your your right when you’re not. 

I don't really have experience in building MF but have a lot of experience borrowing money for my projects that are as big as MF deals. Just different as they are SFR deals ( communities) the bank underwrites the probability of success as well and relies heavily on MAI appraisals and data gleaned from those.. with MF I would think there are companies that do market studies.. just like for storage you hire a company to do a study to prove your project will have demand.. So it comes down to absorption..

In commercial office its seems they put those up.. and they can take some time to fill..  there is a project around the corner from one of my deals that has been vacant going on a year..  I think some lenders would want you to pre lease before they loan the funds.. 

So to me you have two components can the sponsor actually build it on time on budget.. and will the market support it.. 

Great comments Jay.

The banks generally banks like to see 50% pre-lease on commercial development projects like office and retail. Of course this all depending on the strength and track record of the developer and the amount of equity invested. Multifamily is different. It's all about the financials and the track record of the developer. Pre-leases are not a consideration or requirement however they do look at projected rents to determine the feasibility. 

This actually provides an additional layer of support as the banks are very thorough with underwriting ground up developments especially multifamily since they take such a long time to get to stabilization. 

Morning Greg  Hope U had a nice long weekend. !!! Portland weather has been over cast in low 70s  LOL.. I guess summer starts Monday.

the point I was trying to make is that if there is a Senior lender in the capital stack they are going to do some pretty good due diligence on the feasibility of the project.. 

I guess one thing a person could look at also is how much dirt is available within range of the project to compete .. We are seeing stress in the PDX lux market IE over built a tad for high end new apartments and in our market you cannot make anything pencil if its not high end lux .. given that 300 to 400 bucks a foot to build nothing else works.   Low income MF housing is just an Oxymoron and a dream of politicians.. :)