Value in real estate development is generated through the careful management and understanding of risk before construction begins.
At Carpathian Capital Management, we view ourselves as stewards of our investors’ capital. Every project has a narrative and a spreadsheet; our role is to verify the details of both to ensure the opportunity is sound.
Here is how we approach due diligence at every step.
1. Partnership Quality Comes First
Most of our investments are joint ventures with well-established local or regional developers. The quality of the partnership is just as important as the real estate. Before we review terms, we conduct a thorough “operating partner” review.
This involves evaluating their organizational depth to ensure they have the internal resources for construction management and accounting, rather than relying on a single person. We also examine their track record across different market cycles to see if they consistently deliver on time and on budget. Financially, we review balance sheets to confirm they have the liquidity to handle the unexpected. Finally, we go beyond standard background checks by speaking with lenders and former equity partners. We want to know how they operate when things don’t go according to plan.
2. Independent Financial Analysis
We respect the sponsor’s pro forma financial projections, but we also verify them by building our own financial models. We scrutinize the budget, checking to see if costs are based on actual vendor bids rather than rough estimates. We also look beyond the “Base Case” to run “Stress Cases.” We need to know what happens if sales slow down or costs rise. Ideally, the deal should still make sense in difficult scenarios, not just when everything goes according to plan.
3. Verifying Market Depth
We validate pricing and absorption rates using third-party market studies rather than relying solely on projected demand. We analyze the competitive landscape—what else is being built nearby and at what price point? If a sponsor assumes a certain sales pace, we cross-reference that against data on what the market is currently absorbing. We prefer to underwrite based on conservative estimates rather than optimistic projections.
4. Validating the Real Estate
Good underwriting cannot fix bad real estate. We engage legal and technical experts to verify the physical realities of the site. This includes reviewing zoning entitlements to ensure we can build what is planned, confirming utility capacity, and conducting environmental assessments. We also examine the title for any easements or restrictions that could impact value.
5. Structuring for Alignment
Due diligence is also about how we structure the investment. We look for partners who have meaningful capital in the deal alongside us (“skin in the game”). However, alignment goes beyond co-investment.
We typically structure deals so that investor capital sits senior to our partner’s profits. This means our funds receive a return of capital and a preferred return before the sponsor is eligible to receive its share of the profits. We also utilize tiered waterfalls, meaning sponsors earn higher shares of profits only if the project hits specific performance hurdles, ensuring they are rewarded for excellence rather than just participation.
To protect against budget creep, we frequently negotiate cost-overrun guarantees. Additionally, in land development deals where finished lots are sold in bulk to a builder, we often secure non-refundable deposits to further insulate our equity from downside risk.
Discipline in Selection
You rarely hear about the deals that don’t happen, but a significant part of our strategy involves declining opportunities where the data or the partnership doesn’t meet our standards.
For us, due diligence is the foundation of our commitment to preserving and growing capital over the long term.
If you would like to know more about the specifics of our due diligence process or review the checklists we use, please contact us. We are always happy to discuss the details.
