New ventures are exciting. The chance to build something literally from the ground up and watch it grow and thrive can be an enticing reason to start a real estate project. However, before you take that first step, you need a thorough understanding of the potential risks involved.
You may need to conduct a great deal of research and due diligence to understand the risks associated with a project. Depending on what you discover, you may decide to abandon the project or mitigate the risks and move forward.
Your project dictates some of the risk
The projects themselves can be high risk or low risk or anything in between. The following are examples of the two extremes:
- A high-risk project often does not have occupants lined up for the completed project. You speculate that the demand will be there when the project is complete.
- A low-risk project often already has one or more occupants lined up. In fact, you may be building the structure specifically for those occupants.
Obviously, your risk increases as you reach the speculative project level.
To some extent, all projects are high risk before all of the pieces are in place. To minimize, or at least understand, the risks associated with the project, you may need the following:
- Construction and other permits
- Market analyses
- Feasibility studies
- Infrastructure improvements
- Acquisition of land
- Right to purchase needed land
- Plans for the site, building and development
- Environmental assessments
Issues regarding any of the foregoing could potentially delay, if not derail, your project. In order to increase the chances of success, further research may be required to ensure that you receive everything you need to move forward.
One area that often hangs up many projects is in zoning. Obtaining a land use permit can often make or break a project. You will more than likely not receive your construction financing until you secure this permit. Delays could come from many sources. You could spend a significant amount of time, and money, resolving the issues causing the delays.
Anyone who has ever been involved in a construction project knows that delays are a distinct possibility. Even so, the risks during construction are now less than they were before. If you accounted for potential delays, supply issues and the weather, among other things, you are probably ready for those risks.
More than likely, if you did not already have tenants or buyers lined up for the project, they begin in earnest at some point during the construction. In order for the project to succeed, you need to fill the space. Marketing becomes crucial at this point.
Business and legal issues
After considering all of the above, you may decide to move forward with the project. Before you do, you may want to protect your interests by putting your agreements in writing and understanding all laws applicable to the project. Whether it's the land purchase, obtaining permits or financing or negotiating leases, you may benefit from having a real estate attorney in your corner. One risk that you don't want to take is that your contracts and other agreements fail to protect you as you enter into a new venture.