Due Diligence Failures: If You Claim It You Have to Name It
Commercial real estate new construction financing includes a myriad of risks and claims by the developer that are not substantiated with third-party due diligence documentation create automatic rejections that are avoidable.
Due diligence documentation is what the institutional investment market turns on when it comes to commercial real estate new construction financing. The institutional investment market is where most new construction commercial real estate financing transaction eventually end up, so ignoring the comprehensive due diligence documentation requirements owing to “safe and sound” institutional investment underwriting standards is a sure-fire way of getting rejections for your project.
Claim It – Name It
If you claim it, you have to name it – meaning, you have to name the third-party source that supports your claim. Every single claim you plan to make has to have a third-party source or it becomes a matter of future dispute that could end in an allegation of a fraudulent investment inducement. Rather than face that prospect, the lender or investor will simply pass on the deal. This means:
- Pitch deck presentations must be free of hyperbole;
- Material facts have to be supported by reports, opinions, analyses, etc., that you have in-hand when asked;
- Funding proposals footnote sources for key elements;
- Third-party validation for feasibility, capacity, collateral, credit, default risk and valuation have to be part of the deal.
- Create a digital deal room where all the supporting documents can be easily reviewed.
Due diligence is critical both before and after the transaction. This relates directly to default risk and execution risk, so don’t leave these issues on the table or your transaction will never get off the floor.