Due Diligence for Developments

Commercial Real Estate Toolkit

Due Diligence for Developments

When purchasing commercial real estate for purposes of future development (or re-development), in addition to obtaining third party reports, the developer should use the due diligence period to obtain the public approvals and entitlements necessary for a successful project. Contracts for the sale of undeveloped land or the sale of improved land for redevelopment should provide a long due diligence period, ranging from six to nine months with rights to extend for more time, if needed. During this time the developer should accomplish certain objectives:

• Engage a civil engineer to determine the infrastructure needed for the development and prepare engineering plans. Everything from subdividing the land, to installing utilities, roadways, parking lots, sidewalks, lighting, stormwater detention and more must be considered both from a practical and legal compliance perspective.  Through this process, the developer may discover unexpected limitations as to where the buildings may be situated or that budget busting improvements are necessary for the project to function properly or to comply with applicable laws.             
• Engage an architect to design and prepare conceptual plans and renderings for the buildings that will be constructed. The architect should review the developer’s goals and budget, the zoning code and other applicable laws that govern development of the land where the project is located and design the project to be attractive, functional, economical and legally compliant. The end result should be preliminary plans that meet the requirements of and are presentable to the governmental authorities who control development where the project is located.     
• Obtain zoning, subdivision and other public approvals. While it may be the case that the developer can build the project as a matter of right where the project is located, often, the developer will need to seek some relief from the existing zoning or subdivision laws that govern the property. If the land is located in an unincorporated area, the developer may need to connect the land into an adjacent municipality through an annexation agreement.  Sometimes, the developer must obtain a zoning change, variance, planned development or special use permit in order to build the desired project. These processes can take many months, involve notification of nearby property owners, preparation of expert reports and studies, diagrams and renderings, and require public hearings before plan commissions and other governing bodies.  The developer should not close on the acquisition of the development site unless and until satisfactory public approvals needed to construct the desired project have been obtained.               
• Determine the availability of and obtain incentive approvals. There may be public incentives available to help the developer finance the project. The government may desire development and job creation, particularly in blighted areas, and may help pay for part of the project cost. In Illinois, for example, there may be incentives available in the form of real estate tax relief, tax increment financing (TIF), sales tax sharing agreements, and other programs.  The standard for obtaining these incentives typically involves the project not being feasible from a cost perspective without the incentive.  In order to maximize the opportunity of obtaining the most generous incentives possible, the developer should apply for the incentives at the same time the developer applies for its other public approvals, and prior to acquiring the real estate.              

By following the recommendations above, the developer can determine during the due diligence period whether the desired project is feasible. If the developer determines that the local government will not approve the project, or there are unexpected budget busting costs, the buyer can terminate the contract or renegotiate the price before the end of the due diligence period.