Why is Due Diligence Important Anyway?
You may have heard the words “due diligence” many times, but why is it so important? You are probably seasoned in real estate development and you have done this many times and you think you know what to expect but you cannot expect the unexpected! You might be on the other end of the spectrum and it’s your first development project and you are relying on the fact that someone will say something if you make a bad assumption but you know what happens when we assume! In my estimation, due diligence is one of the most important things a developer does as every piece of property is unique. There are so many things that can come up on land purchases that affect the deal and the sooner you know about it the better. All of these things will affect your return on the investment, which may affect how much you may be willing to pay for the property – so why base your decisions on assumptions which may or may not be correct? Especially when you have a team of professionals within NAIOP you can rely on!
These are the things at minimum you should look at in the initial 30 to 90 days of due diligence when looking at a new property:
What can I fit on the property for my development?
Make sure to talk to an architect or engineer to lay out a site plan concept so that you know what can fit on the property once you take into account proposed roadway dedications, encumbrances, building setbacks per code, landscape requirements, driveway throat depths, etc. Your leasable area is important to figuring out what you can purchase the property for and a very conceptual site schematic will get you there.
What will it cost me to build it?
This will be a rough estimate at this stage, but it’s still worth looking at. What kind of off-site improvements will be required in order to develop your project? What kind of zoning ordinances are in affect that may influence the cost of the buildings and landscaping?
Getting a General Contractor on your team early is one sure way to help you get valuable cost feedback early in the process.
What are the impact fees involved?
This is often the biggest surprise on a project that was not accounted for in the pro forma stage of the evaluation. These fees vary so widely from entity to entity and cannot be ignored. As an example, did you know that the Southern Nevada Water Authority connection fee alone for a 1½” public domestic water meter is $19,170, and for a 2” public domestic water meter is $64,260? Knowing this information, you might make sure that you do not promise a tenant a 2” public meter when 1 ½” might suffice for their needs or look to negotiate for a private sub meter so that two tenants can share a public meter. Having the information on costs helps you make better decisions as the developer.
What are the permit fees involved?
Depending on the entity and project size, these can be a significant cost and should be included in the project cost initially.
Does anything I have agreed to in my LOI with a potential tenant impact cost?
Have your engineer, architect and general contractor review your LOI’s before they are inked. They often have very valuable feedback that can save you cost down the road. For example, many retail tenants will always put in the LOI that they require their own separate public domestic water meter. In a shopping center with multiple tenants, it might be in the landlords’ best interest to have one common public domestic meter and sub meter for the tenant which is a very significant cost savings up front to develop the property. Get that feedback early before it’s too late and you have agreed to something you might not be able to change later.
What are the encumbrances on the property?
Make sure you have a current title report with copies of all exceptions listed in the report for review. It is important to make sure you have these reviewed for red flags. For example, is there a 50’ wide NV Energy easement bisecting the parcel? Is there an existing patent easement that will be required to be vacated (discretionary approval)? It is always recommended that a professional surveyor prepare an ALTA Survey to review all site conditions including terrain and encumbrances.
What utilities are available to serve the property?
I always use the example that sometimes you can have an overhead power line running right adjacent to your property and assume you must have power available only to find out that the nearest available capacity power line is a mile away, and you have to pay to get it to the site! Never make assumptions with this – have an engineer do the research with the utility agencies to know for sure what the availability is for water, sewer, gas, power, cable, and telephone. Whether or not there are existing water meters on the property could have a pretty significant impact on the overall project cost, so it is worth doing a little research up front to know.
What entitlements are required in order to waive contingencies on the purchase price?
What is the property currently zoned and what would it have to be zoned to build what you want to build? What discretionary approvals are required and are they conforming to the master plan, or would you be proposing something pretty controversial and risky? What would make you feel comfortable waiving contingencies with the seller?
How long will it take me to entitle the project and how long to permit it?
Every entity is different, and timeframes vary based on workload. Have your engineer and architect give you a schedule estimate for how long it will take to complete all discretionary approvals, and then how long to permit it for off-sites, on-sites, and building permit(s). Be sure you have a good understanding of the process and steps involved as this will affect your committed “go hard” date and closing date.
Are there any geological or environmental concerns on the property?
Talk to your geotechnical and environmental engineer early – maybe they know the area that the parcel is located and can give you some rough idea of the soil condition, or know for a fact you will hit caliche at that parcel. Also, check the record environmental information on the property. Of course a full geotechnical report and Phase I are recommended, but at a minimum have a conversation with a professional in this area of expertise within the project location area.
Does the property need to be subdivided?
Why does this matter? For any subdivision within the Clark County area (so all jurisdictions), you are required to improve or bond for all off-site improvements adjacent to the “mother parcel” you are subdividing. For example, if you are dividing a 10-acre parcel so that you can develop 2-acres, you will be required to improve all off-site improvements for the entire 10 acre parcel, unless you are granted a waiver from that requirement through a public hearing process which is a discretionary approval.
Is the property in a flood zone and does it have any significant drainage issues?
Many people think that because Las Vegas is a desert, we don’t have to worry about flooding or drainage issues. Not the case at all. In fact, this can be a very significant cost on a property and may be the reason you are being offered a good price! Make sure your engineer checks if it’s in a flood zone, the nearest Clark County Regional Flood Control District facility and whether it’s existing or proposed, and if there appear to be any significant washes on or around the subject property. These can be significant costs and you need to know early.
What is the general terrain like?
Is the property at a fairly modest grade of 2% or is it a hillside and significant grading effort will be required to build your project. Earthwork can be a significant cost and sometimes the terrain will limit what you can put on the property – so don’t forget about the dirt!
Who are my due diligence partners?
Your due diligence partners are the team of professionals you have worked with and trust on previous projects, and if that doesn’t exist, ask around to your local NAIOP members for some recommendations. You should always have an Architect, Civil Engineer, Geotechnical Engineer and General Contractor whenever possible to help you assess the feasibility of developing a piece of property.
These are all things that can come back as a surprise when it’s too late and a little bit of effort on the front end can certainly almost always save you money and surprises on the back end!
Jody Walker Belsick, P.E.
President, Walker Engineering, LLC
@walkercivil | www.walker-eng.com | jbelsick@walker-eng.com
