Investing in commercial real estate development often comes with enormous risk. The many variables, such as weather, the availability of materials and labor issues, may make any investor lose sleep over a project. If you have invested previously in a commercial real estate project, you may already have experience with the things that could go wrong, particularly when dealing with developers.
The more you know about a developer and the way that developer works, the better you will be able to anticipate potential issues and plan for contingencies. The most common factors many investors look for in a developer are transparency, communication and effective cost control. These factors will likely influence the success of your deal.
What to look for
Your relationship with your developer is critical. However, developers work with many contractors and subcontractors, and you certainly don’t want to lose control of your project with all those hands in the pot. Before you invest in a commercial real estate project, knowing the answers to important questions about your developer and operators is one way to minimize your risk. Some factors you will certainly want to investigate include:
- Accountability: How will your developer keep you apprised of project schedules and spending? When and how will operators or developers notify you if your project experiences an emergency setback?
- Bidding: What process does your developer use for evaluating competitive bids from subcontractors and keeping you informed of the progression of those bids?
- Documentation: How does your developer maintain the many records, notes and forms necessary for a large project, and how does he or she keep those documents secure yet accessible to you?
- Foresight: What are the physical and financial plans for property maintenance and inspections for the future, for example, three to five years?
Business experts recommend contacting clients who are currently working with your contractors, not a list of past customers. This will give you a better idea of how the contractor is working now and if there are any factors that may interfere with the company’s ability to perform well for your project.
Seeking professional advice
Minimizing risk is key to any investment, and the best way to ensure your risk is low is to investigate the parties who will be included in the project. Additionally, having appropriate and adequate insurance coverage will provide you with security and peace of mind.
With the many factors and contingencies involved in large projects like commercial real estate development, having the advice of an experienced attorney will be invaluable. Your attorney can answer your risk management questions and advise you on any aspect of your investment project. Additionally, if you should face legal issues regarding your commercial real estate investment, you will have an advocate to represent your interests.