How Can Commercial Property Developers Prepare for the Unexpected?

While property development can be extremely lucrative, it is also rife with risks.

While property development can be extremely lucrative, it is also rife with risks. To prevent challenges from derailing your project, it is imperative to do your best to control all contingencies by surrounding yourself with the right professionals and calling on their collective experience. At the same time, developers should always expect the unpredictable and prepare for that too. 

So, what exactly should you be prepared for? Based on my experience in commercial real estate, the list is endless and varied. While advising a client on a project in Hurleyville, New York, the site contractor called my client to report that workers accidentally dug up the grave of Mrs. Hurley, the wife of the man who founded the town. As you can imagine, the discovery delayed the project

While it is impossible to address every possible hiccup, due diligence should still always be a priority. Title, zoning, and environmental due diligence can all reveal red flags and prevent developers from wasting millions of dollars on an unsuitable property. Nonetheless, it is also important to recognize that even a thorough due diligence process won’t always reveal every potential pitfall of the project.

Site Selection Risks

Site selection is one of the greatest pitfalls for developers. Even after conducting environmental due diligence, you can never really be sure when may be lurking on (or under) the property.

A client learned this difficult lesson when its excavation contractor dug up pockets of white phosphorous that burst into flames when the particles hit the air. The contamination was likely the result of the property having previously been used to make incendiary bombs during WWII. Prior to starting the project, the developer had conducted a Phase I and Phase II, hired a Licensed Site Remediation Specialist, developed a Remedial Action Workplan and went so far as to bid the cleanup before closing. Unfortunately, even with all the borings that were performed, the developer never saw this coming. The additional cost was over $1million. The developer’s pollution legal liability (PLL) policy ultimately saved the day and covered the cost of the previously undiscovered hazard. 

As highlighted above, it is impossible to be absolutely sure that a property is free of environmental contamination, even when due diligence is conducted “by the book.” Thankfully, there are several types of environmental insurance that can help mitigate the costs and risks associated with environmental contamination.

Permit and Approval Delays

The permitting process can also be plagued with uncertainty, even with proper planning. At the outset, developers should analyze all potentially applicable local, state, regional and federal permits and the steps that will be required to secure them. Unfortunately, the rules can often change while the project is ongoing.

A client recently obtained land use approvals for a 350+/- unit building in Jersey City with underground parking. After obtaining the approvals, the New Jersey Department of Environmental Protection (NJDEP) changed how it interprets its regulations on below ground parking in flood zones. Where it was permissible with conditions not long ago, it is completely prohibited now. The project as it stood was no longer feasible, and the only solution was to modify the project with less parking and fewer units, get a new approval, and start building. 

While there was no way to foresee that the NJDEP would reverse course, developers can reduce the risk of getting caught off guard by zoning and land use changes by building and maintaining rapport and trust with local boards and permitting authorities. Retaining consultants who regularly work with local officials and understand the “lay of the land” can also make it easier to resolve issues when they arise.

Poor Budgeting

Surprises in the development process can quickly escalate costs. From labor/material shortages to permitting delays to newly discovered environmental contamination, there are a myriad of issues that can all chip away at a small contingency. With a larger reserve in place, developers aren’t forced to scramble to secure more funding. A sizable financial cushion also helps ensure that surprises don’t sink the project completely. 

When planning a development project, it is imperative that the budget allow for foreseen delays and costs. If you can’t afford overruns and still make a profit, it is often advisable to go back to the drawing board.

Key Takeaway for Commercial Developers

Proper planning is essential to a successful development project. Unfortunately, many developers fail to address how they will deal with the unexpected. When surprises arise, it is essential to have skilled professionals on your team that can spring into action to find solutions. Being able to quickly turn to experts can save both time and money and reduce the risk of further headaches down the road.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact Don Pepe or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.