Commercial Real Estate Red Flags & Deal Killers

Underwriting a development project, especially from the group up, can be a tedious process. The underwriting phase is the time where developers should keep their eyes open for any red flags or deal killers that could jeopardize the success of their projects. These are any factors that indicate significant risks or challenges that threaten the advancement and profitability of the project. Here, we’ll discuss some major deal killers that I like to look out for when underwriting my flex deals.

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Zoning and Permitting Issues

‍Any challenges in obtaining permits or significant delays in the process could threaten the completion of the project. Similarly, an inability to obtain necessary zoning approvals or rezoning for their intended use also poses a risk. Proper zoning and permits are necessary to complete the project as intended, so look for areas where permits are more easily obtained.

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Environmental Concerns

‍The presence of environmental hazards or contamination should be avoided to ensure safety regulations are met. These issues are also associated with additional remediation costs and regulatory compliance. Additionally, avoid land that is in close proximity to environmentally sensitive areas or protected lands, as you risk harming any endangered species and jeopardizing your development.

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Market Demand and Feasibility

A lack of market demand, oversupply of similar properties in the area, and unfavorable market conditions all threaten the project’s success. Also look out if there is insufficient market support for the project, such as weak tenant demand or limited buyer interest. All of these factors hinder the project’s overall progress.

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Construction and Development Risks

‍Construction is one of the most important phases of the development process and therefore, it’s important to be extra vigilant for any red flags. These could include an inexperienced or unreliable construction team, unrealistic construction timelines, cost overruns, or significant challenges related to site preparation or infrastructure development.

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Legal and Title Issues

‍Legal disputes, pending litigation, title defects, and other legal limitations should all be avoided. Look out for any legal restrictions that may affect ownership or developments.

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Identifying these red flags and deal killers during the underwriting process allows investors or underwriters to assess the risks associated with a ground-up development project and make informed decisions about its feasibility and profitability. It's essential to conduct thorough due diligence and seek professional advice when encountering any of these warning signs. To learn the step-by-step process I use for all of my flex space developments, including how to avoid red flags and mitigate any development risks, head over to Flex Space Untapped and lets get started!

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