Thread by @TihoBrkan

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.

theatlasinvestor.com

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