The Due Diligence Process Has Changed
It is no secret that there have been many shifts in the way the world does business in the last few years. New trends have emerged and continue to evolve. As development consultants, we have witnessed these changes from governing agencies and developers, and one shift is in the due diligence process.
Due diligence is the process of assessing a site to identify and mitigate potential risks and determine if the site is suitable for the intended purpose. With new clients and investors looking to capitalize on the hot commercial market, the demand for due diligence assessments has increased. Clients, new and old, are often investigating several complex projects simultaneously. Historically, our team might review a few sites at a time for a single developer. In today's market, clients may look at 5-10 sites and move forward with none of them. Let's look at the significant impacts to the due diligence process for governing agencies and developers.
1. What has Changed with Governing Agencies and the Due Diligence Process?
City and county governing agencies are continually modifying their development regulations. These modifications require nearly constant research by consultants during the due diligence process to help assess potential risks and costs. To be more efficient, our design teams prepare a list of project requirements based on the development regulations and then set up pre-development meetings with governing agencies to review assumptions. The meeting is ideal for the governing body to communicate new or potential upcoming changes to their rules and guidelines, provide feedback on the site and concept building plans, and discuss any project issues or complex design constraints associated with the site. There have been two major changes in these predevelopment meetings.
A. Ease in Scheduling Predevelopment Meetings
Prior to the coronavirus outbreak, scheduling pre-development meetings with governing agencies could be challenging. Most of the pre-development meetings included key representatives from different departments having a wide range of commitments. With so many stakeholders, meetings had to be scheduled weeks out. The pandemic transitioned meetings to the virtual environment, which greatly improved scheduling timeframes. Some governing agencies have embraced these meetings wholeheartedly and improved their IT (Information Technology) systems to accommodate. We expect this trend will continue.
B. Enhanced Collaboration
When pre-development meetings were held in person, a printed plan set was typically shared, providing all members of the group an opportunity to review and make verbal and handwritten comments. At the close of the in-person meeting, one document contained everyone's notes for future reference. Virtual predevelopment meetings prompted new ways for meeting members to collaborate. Attendees can share their screens and review drawings while making electronic notes. After the meeting, all members have an electronic version of the meeting notes.
However, because of the ease of virtual meetings and the upward trend in the number of due diligence projects, governing agencies are being inundated with submittals and applications for development. To balance the load, governing agencies are pushing applications to later development cycles and are more selective in the number of applications they accept.
2. What has Changed for Developers in the Due Diligence Process?
With the increased number of sites being assessed, developers are getting crafty in their requests for due diligence on a site.
A. Commercial Broker Representation
An increase in commercial brokers representing first-time land investors looking to develop parcels of land has also increased the need for due diligence reports. Often, commercial brokers want to limit the cost of due diligence and complete the bare minimum of research with an emphasis put on the existing site plan. This often overlooks important environmental, water resources, traffic, land survey, and utility infrastructure needs on the site. The consequence of skipping these tasks may add significant risk and costs later in the project.
B. Completing Due Diligence Chronologically
Another unique change is that developers have started to perform due diligence chronologically. If one item is a deal-killer, the rest of the due diligence does not need to be conducted. The issue with this approach is that it takes longer to investigate each item one at a time, and with shorter due diligence periods, developers are locking in projects where they may not have a complete picture.
Successful outcomes are more likely when developers first gain an understanding of the risks of cutting the due diligence scope and where they can incur design costs later as a result. Armed with the knowledge upfront, many of our clients confidently invest in full due diligence to mitigate issues and realize returns later in the project lifecycle.
Finally, timelines affect project finances, especially in the current volatile market, so communicating openly about the schedule and its critical role in the site's viability is essential throughout the process.
Westwood helps our clients maneuver the shifts in development strategy and the due diligence process with professional guidance at the onset of a project. By sharing our knowledge, delivering timely site investigations, assembling potential risks, developing realistic schedules, and continuing to strengthen governing agency relationships, our clients feel more confident in selecting the right site to meet their project objectives.