What Tends to Fall Through the Cracks During Development?

Question

I am evaluating a couple of potential development opportunities, and one thing that has become clear is the importance of building the right team from the beginning.

I'd be interested to hear from experienced developers and owners: what tends to fall through the cracks during development and construction that owners don't discover until it's too late?

Areas I'm thinking about include:

• Capital raising and investor relations
• Loan readiness and lender requirements
• Permitting and utility coordination
• Contractor vetting and oversight
• Project monitoring and schedule management
• Municipal approvals and inspections

Coming from a lending and risk management background, I can see strengths in capital raising and loan readiness. What concerns me more are the permits, utilities, contractor oversight, and dealing with municipalities, since those seem to have a significant impact on timelines and project execution.

For those who have been through the process, where have you seen the biggest surprises, delays, or costly mistakes occur?

Allan Smith · Answer

Well probably the #1 thing that gets owners is build costs creeping up, sometimes very quickly. Many reasons for this, but I'd say the main three are 1) builder undershot the bid and really should have known better 2) owner adds stuff and isn't connecting the dots that all these little things add up 3) Scope changes come up for regulatory reasons (didn't know they would need a firewall in a townhome, etc)

#2 thing is for sure regulation/ordinance costs and delays. This got me good on a few developments. In most cities, there's a lot of rules to follow and some of them you get to find out about later! =D Below is an example piece of land that would be buildable if it wasn't for a 50' wide stream buffer.

Henry Clark · Answer

OP any "small" miss can set you back on time and dollars.

1.  Have an Engineering firm pull together.  Many Many issues can come up, that they should identify.  Soil compaction, setbacks, zoning, utility access, road access, etc etc.  The color of your Fire Hydrant nearest you.  Is it private or public?  Do you need to spend $100,000 to bring Water or sewer lines to your property?  Are you talking a Putt Putt golf course or a 5-story condominium next to a river, etc.  More details help.

2.  Right now, financing is your biggest wild card.  Development- zoning, engineering, drawings, construction team, mother nature, financing, etc cause for a lengthy window before you get to your final financing.  You might start at Interest Only during construction of say 7%, then by the time you're done it could be 9% and the deal doesn't work.

3.  Zoning- is this project automatically allowed?  Or do you have to go thru Variance or Special Use permit that takes 2 readings, and maybe 5 months to get thru approval.  You should vet this with the Planning Zoning department.

4.  Experience- without knowing your development background, going to make an assumption.  You would not be asking these questions if you had already done development.  With that said, almost zero bankers or investors will invest with you.  You will need a General Partner who brings that story to the table.  Commercial and Industrial, you can't get financing or investors without a track record.  Unless it is a small project and you have the assets to sign a personal guarantee.

5.  Market Study- How good are you or one of your General Partners?

6.  Unfair advantage- all projects are tight right now.  Does your project have an Unfair advantage from a Marketing standpoint?

7.  Risk Analysis- looks like this is your wheelhouse.  Once you have your baseline Deal Analysis done, do a Capex overspend, Interest rate hike, Occupancy failure by x%.  Do each Stress test independently of each other.  Take each one till it hits your Breakeven, which covers both Expenses, but also P/I.  Understand what it takes to fail.  Then come back and try to address each one.  For Example if your doing Apartments.  And your break even occupancy is 70%.  Be able to address how you overcome a short fall.  Your product might be in a different subset.  Gated, Covered parking, or could be a high end location.  So your competition is high end, but if you had to, your could lower rents to fill in another 20%.    Whereas if your base level apartments and rent for 1 month free, $1,200.  Existing buildings.  You could lower your monthly rate, but taking it down to say $800 might not cover additional capex and turnover.

If this is a commercial loan and you start at 7.5% interest rate with a 5 year balloon.  What does your cashflow look like at 9% when it re-ups?

If an LLC or a Syndication, do you have the Investors Locked in for the term of your Deal timeline.  Is this a 3/5/10 year payout?  Make sure your financing matches your payout timeline.

8.  Storm pond and set backs- how much eats into your Rentable or profit generating square footage?

Million other questions.  The more detailed the scenario, the better the response.  Each project is different.  Risks are different.

Henry Clark · Answer