Due Diligence Helps Avoid Costly Fees
In commercial real estate, the word “unforeseen” is often used to express regret. Unforeseen costs and unforeseen project delays are explanations of why a project was less successful than expected. The best protection against these disappointments is the process of due diligence.
We typically advise our clients to begin due diligence as soon as they have signed a Letter of Intent (LOI). We begin our Site Investigation Report (SIR) process, which includes a project site and jurisdictional visit, consultation with the landlord or developer, and thorough review of the executed LOI. Ideally, the SIR is reviewed by our client and the client’s architects, engineers and contractors before any large financial commitment is made.
For any new development project, the engineers, contractors and architects provide upfront estimated costs. Development fees levied by governing jurisdictions are sometimes overlooked. Impact fees are assessed on new development by cities and counties to fund growth infrastructure. These fees can amount to several hundred thousand dollars – enough to destroy budget integrity and nullifying a project’s pro forma financials.
When impact fees are identified during the due diligence process, there is ample opportunity to reach workable solutions. Here are some examples of how impact fees can be administered to create favorable outcomes for developers.
Transportation Fees: In some cases, a landlord can make accommodations to reduce transportation impact fees. A landlord might be able to absorb some of the transportation impact fee cost through already satisfied impact fee agreements within a larger development project. Some landlords, sympathetic to their tenants’ financial burdens, might even agree to reexamine lease terms. We have even worked with landlords to present arguments against a concept’s use categorization in the municipal code (quality restaurant, entertainment use, fast food, etc.). Additionally, the assessing jurisdiction may be willing to negotiate the reduction of impact fees when the fate of a project is jeopardized by such costs, especially in today’s economic climate.
Capacity Fees: Other large and often unavoidable site development fees are water and sewer connection fees, sometimes referred to as capacity fees. The fees are charged by most water and sewage providers; they are calculated according to a myriad of different factors and equations (meter sizes, plumbing fixture counts, total seat counts, etc.). If identified early enough, these fees can be reduced through redesign. If nearby utility lines have sufficient water pressure, smaller sized meters can occasionally be installed to reduce costs (larger meters generally increase costs). Because restaurant sewer connection fees are sometimes based on seat counts, a floor plan might have to be reduced or modified (bar stools vs. fixed seating) to decrease costs, or possibly even to meet an exceeded parking code based on a total seat requirement.
Understanding and recognizing transportation and capacity fees that affect time and costs, and ultimately determine the fate of a project, is just one aspect of comprehensive due diligence process. When undertaken early in the process and performed well, due diligence might be the most critical phase of any building construction project.
(Part II of the blog topic – advantages in early due diligence of discussing zoning ordinance regulations and how such regulations can restrict a tenant’s prototypical design and brand identity.)