I’m going to make a statement. You may agree or disagree. But, for the sake of this article, I’m going to make this statement and stick to it. Here it goes:
Real estate development is “sexy.”
There are certain professions that seem to have an undefined panache to them. An architect comes to mind. So does a doctor, astronaut, and chef. These professions just seem to have an allure that other professions don’t always have. I would argue that, on the surface, real estate development also has an allure to it.
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Why Real Estate Development is Sexy
I was asked recently to describe what is so great about real estate development…easy.
- It’s entrepreneurial. You are essentially creating something out of nothing.
- You have a direct impact on the improvement of your community.
- You are managing the entire planning, financing, building, and selling process.
- You can point to your project and see it, touch it, and claim “I built that”.
These are all great things and motivate many developers in the industry. But with any profession there are always elements that make it, shall we say, not so “sexy.”
The Un-Sexy Side of Real Estate Development
After going on and on about the many great aspects of development, I was then asked what I didn’t like about real estate development. While I wasn’t jumping for joy to lament, one recent email I received came to mind almost immediately. In many ways, it sums up what is so challenging about developing real estate.
One morning I got to the office, turned on my computer, and saw an email at the top of my screen with the subject line that read:
“Stop the project. We got killed in zoning last night.”
I was shocked, mystified, and quite unhappy. The email related to a project that had been green lit after months of research, lengthy due diligence, and careful planning. This project, in almost everyone’s minds, should have been a slam dunk. It was soundly underwritten, very well designed, and would have greatly improved the fabric of its community—win, win, win for all involved. Yet, after months of work (and thousands of dollars spent), it was derailed in the entitlement process.
When people comment that real estate development is a risky venture, it’s usually because of the exhaustive list of expenses, planning, and research required upfront to get a project off the ground. A common phrase in the field is “90 percent of the work is done before one sees construction crews on the site.” Pair these points with the notion that a project can be stopped dead in its tracks because of one or a few issues and you start to see its “un-sexy” side.
Common Pre-Construction Costs for Development
It was fortunate that the particular project above didn’t incur any additional expenses. Had it continued on and been halted later in the process, the losses would have been far greater. While this isn’t an exhaustive list, here are a few of the common expenses incurred on the project before that fateful email:
- Architect fees – design, administration
- MEPS Engineer
- Structural Engineer
- Planning Consultant
- Geotechnical Consultant
- Environmental Engineer
- Vertical Lift Consultant
- Surveyor and Boring
- Testing and Controlled Inspections
- Engineering Inspection Fees
- Environmental Inspection Fees
- Interior Designer
- Borrowers Legal Fees
- Tax Consultant and Fees
- Risk Insurance
- Liability Insurance
- Plan, Printing and Reimbursements
- Market study
- Underwriting fees
- Marketing plan, development
All of these expenses were incurred before a shovel was put in the ground or a construction draw was made. Yet because of an entitlement issue, the project was shelved and put on the back burner.
It’s always tough to put a tremendous amount of work into anything and not see the rewards. While the fate of the above project is common for many, developing real estate is still extremely exciting and rewarding for those that are able to see their work through to completion. If you’re developing a project, don’t be deterred by the mountain of work required upfront. Just be extremely careful and thorough about your work because the reward could be worth the extra effort in the end.