Tiho Brkan Profile picture
16 Oct, 19 tweets, 4 min read
How to do a due diligence process for development projects:

1) start with the project overview which explains the key figures & stats

1a) if this isn’t attractive, 90% of the time you’re not going to bother with deeper analysis

2) look at the GP / developer, their recent...
...and long term track record, especially the way they handled the last major recession (2008)

3) understand the location, both the macro (country, state, city) & micro side (borough, suburb, streets) and focus on transport links, infrastructure and surrounding amenities
4) analyse the macro & micro location price trends over the last couple of decades, last few years and especially price trend pre & post Covid

5) now start focusing on the proposed construction projects, doing due diligence on building permit / developer approval first
6) next focus on the basic architectural plans and understand the residential / accomodation outcome

6a) how many units, is it a mix use with commercial units at the bottom, how many sqft/m2 in total, how many levels, what is the floor plan disposition, is parking included, etc
7) now you’re ready to start looking at the financials & business summary of the project

7a) what is the total GDV (gross development value) and how does the price of every unit compare to the nearby offerings (very important work needs to be done here with “comps”)
7b) what is the GDC (gross construction cost) and what is the profit margin (profit on cost) for the project? Rule of thumb is 20%+ profit margins are solid deals

7c) it’s time to take a deep dive into the construction budget? How robust is it? Go through it line by line...
...but if you don’t have experience in construction this will be very though.

7d) who will be the general/main contractor for the build? What is their track record? What is their balance sheet looking like? Ask them about previous and what is their risk mitigation process?
7e) who is doing senior debt financing? Once again, deep analysis is going to be needed here to understand how flexible senior lenders are in case something goes wrong? Furthermore, collaboration with senior debt is advise because they did their own due diligence before lending
8) look at the fees, costs and promote charged by general patent (GP)? What fees are front loaded and which are back loaded (success & performance fees or waterfall structure)

9) understand the alignment of interest between the whole capital stack & all parties involved
10) speaking of capital stack, here you can decide (if the deal is still raw) which capital stack position will you invest in?

10a) Is this going to be a basic LP/GP structure where everyone holds equity? Or will you consider investing in preferred equity / mezz debt, which...
...would give you additional downside protection, but give away the potential control (equity holders & GPs control the project, but hold the highest risk)

11) the exit is probably one of the most important elements of the deal and if successful, the way you eventually get paid
11a) every development we are apart of or invest in, we make sure there are at least 2 or even 3 different exist strategies

11b) obviously everyone would love to sell all the units out and have a home run project with super high ROI, but in reality, you got to figure out what...
...happens to your invest in various case scenarios including the one where only a third of the development is sold (side note: we typically have a full exit with profits under this scenario when investing via mezzanine debt)

In summary, there is a lot of work to do when...
...you’re investing into any private deals, including development projects.

Some key advice:

• work with best in class developers only and stay away from over-levered projects where equity is small & debt is super high

• make sure you’re in prime & trending locations
• cranes 🏗 in the air, better run away! Stay away from areas with future hyper supply in the pipeline (cranes tell the story)

• a deal where the alignment of interest is attractive is the one where GPs don’t charge much on the front end but get compensated when they perform
• if have a choice go with a mezzanine strategy because you’ll still earn a big % but you’ll exit earlier & with far less risk

• make sure you have a really good lawyer to check over the agreements, contracts, convents, and terms+conditions
If you need more help regarding the due diligence process,

Or if you’re investing in development projects and looking for attractive deal flow,

Feel free to reach out on our site.

A quick summary of what we do, with two recent deals we are focusing on — both in London (UK).

Investment: Nonperforming Development
Type: Mezzanine Loan (2nd lien)
Amount & LTV: £2.65m & 75% LTV
Duration: 12 months (remaining)
Return: 20% interest per annum
GDV: £16.9m
Investment: Repositioning Development Scheme (not GUD)
Type: Mezzanine Loan (2nd lien)
Amount & LTV: £1.94m & 71% LTV
Duration: 24 months (projected)
Return: 20% interest per annum
GDV: £53.8m

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More from @TihoBrkan

14 Oct
The black is back!

Over the last several years — working on both our own projects as well as meeting clients' needs — we have used the highest quality natural black materials to achieve incredibly beautiful, modern, living environments.

Here are some interesting pics. Image
Haven't seen our other previous projects?

Read 4 tweets
6 Oct
A friend from Vietnam calls, she is a successful real estate agent.

I used to live in Saigon 5 years ago. She asks how I am? How is everything going during the Covid crisis?

She also asks me if there has been many opportunities in Australia for real estate during the recession?
She remembers that I don’t like buy new off the plan apartments — like the way they sell them across Asia and especially in Vietnam for foreigners.

She knows I’d rather buy distressed and force appreciate them. So she asks me if there are now many opportunities there?
I told her no, not really.

Not a lot of opportunities in Australia that one would normally think would come during a recession anyway.

She asks me why not, obviously completely confused at this point.

I said:

Situation in Australia did not get scary like in 2008.
Read 4 tweets
5 Oct
A lot of success that occurs in life can be attributed to timing — being at the right place and at the right time.

An acquittance of mine told me a story the other about how his father was very successful in real estate until the 2008 GFC came alone.

Result? Lost everything.
Personally, I did some real estate investing after the bust during 2014 onwards — when the boom got underway.

Result? Lifechanging results.

People would like to attribute success to their wits, smarts & intelligence.

The truth is, for the most part, its just luck & timing.
Don't let your ego get in the way. Remain humble & understand that asset prices, the economy, and investing are very cyclical.

Eventually, it all comes back full circle. After all:

"There are two types of investors. Those who are humble. And those who will learn to be humble."
Read 4 tweets
2 Oct
Don’t compete against others.

If it’s not your goal to buy 1 property a year, hit a 7-figure salary or get a 10M turnover start up — then don’t do it!

Just because someone said “it’s a smart thing to do” it doesn’t mean it’s smart for you.

That’s why it’s PERSONAL finance.
Everyone in Australia (CA, UK or US) always tells me the goal isn’t net worth, it’s the number of assets you have producing passive income.

Guess what?

I didn’t follow their conventional wisdom & I did just fine.

I ended up traveling the world for a decade and did it my way.
I didn’t want to manage 12 properties, have massive loans (even if others pay down its debt), nor did I want to have a business start up so I remain stuck in one place.

My financial goal wasn’t “a number” (net worth or passive annual income).

My financial goal was FREEDOM.
Read 4 tweets
1 Oct
1/ As you get better at your niche, you start to recognize the good from the ugly.


• nonperforming loan
• mezzanine debt opportunity
• London construction project
• interest rate 20% pa
• gross exit LTV @ 78%

What is the real risk here? (continued)
2/ At 78% LTV, you do have a meaningful buffer/cushion from the equity holder + their potential profit.

However, the story gets better.

First, traditionally London developers have had to build a certain part of the residential development in the so-called "affordable" space.
3/ As an example, with a 20 unit building in central London, you might also have 1 commercial space below and 4-6 affordable units which are traditionally purchased in bulk by registered housing associations.

These are usually the easiest to sell & go straight away.
Read 7 tweets
29 Sep
The real estate peeps who think 75% LTV is "safe as houses" are another GFC repeat away from getting taken to the cleaners.

US multifamily dropped -25% around the country during the 2008/09 period. High rises dropped -30%. NYC, Phoenix, LA, Palm Beach, Miami all dropped >30%. Image
Not predicting a crash is around the corner, just posting the lessons of the previous downturn, which will be useful to some and a "seen it, but don't care about it" to others.

Today, CAP rates all around the world, not just in the US, are at rock bottom historical levels. Image

Today isn't 2008 anymore.

There are no more rate cuts to be made like in 2008. And they have done so much QE1,2,3 & 4 already, that investors are already questioning the confidence they hold in central banks' abilities to stimulate the economy. Image
Read 8 tweets

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