No new commercial real estate development exists without some form of risk. There will always be issues that emerge and warning signs as to why you might want to avoid hiring a particular developer.
The key is to know what you’re looking for and to minimize your potential risk by finding the right developer. Here is a look at some of the major warning signs you should be aware of when it comes to an underwhelming commercial real estate developer.
A record...of legal issues
Previous legal issues are generally never a good sign and can be a major red flag when searching for a developer. There may be previous lawsuits or pending litigation. Those issues may come in a number of forms:
Legal matters, for one, mean something on the project/deal did not go right, and for two, add unnecessary costs and time to a project.
If you spend time searching public records or other resources, you can find references to past issues and what’s publicly being said about the developer.
Not great with the details
Just like any type of business transaction, the commercial real estate development process requires significant research and investigation. Failure to perform the appropriate due diligence and address the concerns of a site or property can mean problems down the road. Municipal violations could lead to:
Potential tenant displacement
These prices are TOO low
Low project costs may seem like a nice plus when it comes to finding a commercial developer, but it may not be such a good sign if they’re TOO low. If that does end up being the case, you may be looking at a developer that can’t adequately perform the work or they may come back with significant rent increases to account for those low project costs.
Not much of a planner
A history of project delays can be a sign of frequent failed planning. While some delays are unavoidable due to weather or municipal approval issues, a track record of consistent delays that ARE avoidable can result in a significant hit to a tenant’s bottom line.
Ask how they’ve navigated being behind on a project. The answer should give you a good sense of how well-managed the developer is and whether past delays have been avoidable or not.
Track record? More like no record
Check the developer’s history and track record to see if they have the team and experience to successfully complete your project. The industry seems to be filling with inexperienced developers who may lack the knowledge, portfolio, and network needed to ensure a successful project.
Have an open and honest dialogue with past clients and contractors to determine a) if they have the experience and b) if they have the RIGHT kind of experience.
As we’ve noted in this previous blog post, commercial real estate development is a big commitment, and finding the right commercial developer can be the difference between success and failure. Prepare yourself. Know the warning signs and the right questions to ask.