Anyone who has undertaken even the simplest of construction projects or repairs at home probably had the unfortunate experience of one or more aspects of the endeavor going wrong. Translate those relatively simple experiences into a highly complicated project, such as a commercial build to suit or large commercial development, and the resulting stories can be quite interesting.
Smart Business interviewed Jeffrey Baker, principal with CresaPartners, about the current state of commercial development to get insight into this very unpredictable and difficult arena.
Why is the world of construction and commercial development so unpredictable?
Most of us, from the most sophisticated companies all the way down to the local homeowner, don’t do one or all of the following: define and communicate needs clearly enough; follow a process; understand the amount of time required to implement a well-conceived project; or hire the necessary expertise to appropriately plan, organize and implement the project. Failure at one or more of these tasks generally results with the end user being a ‘reactionary’ participant in the process rather than ‘proactively’ controlling and dictating the desired outcome. This almost always results in cost overruns, time delays and unmet expectations.
Why would companies even entertain development/redevelopment if the risks and costs are so high?
There are many reasons why a company would decide to embark upon a development project and, most of the time, the needs are justified. Reasons may include:
- A lack of suitable existing building product or infrastructure
- The need for a specialized facility
- The need for more efficient facilities
- The desire to create a staged growth plan with planned expansions
- Need for cost control/containment with capital deployment
Can you expand upon the need to allocate sufficient time toward the planning process?
Without question, allocating significant time for development projects will increase your odds of succeeding and saving money. Very simply, time equates into leverage. The more time you have, the more leverage you can create in the process to ensure lower costs with vendors, contractors and even developers. I’ve personally experienced cost reductions as high as a 40 percent just as a result of good planning and leverage. The soft and hard cost savings can be substantial, but take it one step further and imagine the cost to a company if the facility isn’t delivered on time (or even at all) or doesn’t even meet the business’s needs. It could mean the difference of whether or not a company remains in business.
How would you recommend a company begin the building process?
Assembling the team is the first step. The team would include the right real estate consultants, engineers, architects, attorneys, contractors and developers, etc. Each consultant is extremely important to the process and can make or break a project. I strongly recommend interviewing and researching the various consultants and players involved. Don’t rely on just recommendations. Research their credentials and experience and this is important make sure they know the local landscape.
It’s also paramount for companies to understand not to be too cheap or try to cut everything to the bone when it comes to consultants, contractors and developers. The old adage, ‘You get what you pay for,’ very much applies here.
What other protections can a company implement to ensure the best results?
Once a project has been defined, you then need to document it. This usually takes the form of a lease agreement or build to sell agreement depending on a company’s desire to own or lease the real estate. Regardless of ownership structure, documenting responsibilities and all aspects of the project is paramount. Simply stated project responsibilities, timelines and cost responsibilities slip through the cracks or are open to interpretation if they aren’t documented well or at all. Contracts should have specific performance requirements and associated penalties to protect the end user’s interests and provide the necessary recourse should something go wrong. While these terms are intended to protect the end user’s interests, the real professionals on the other side of the business should prefer a well-crafted and detailed lease or sale agreement if they are interested in delivering a quality project and satisfying the customer.
Are there any other issues to be aware of in the development process?
Companies should be aware of potential economic incentives from local, state and federal governments. Many times there are economic incentives available for companies when they embark upon a project to help finance things like infrastructure or to provide tax breaks or job training.
The last issue that I would recommend researching toward the beginning of any project is financing. Most commercial development is extraordinarily expensive these days so it is imperative to make sure that satisfactory financing is available and to understand how it will impact the cost of the project. It is also important to know whether your contractors and developers are well financed. Assemble the right team and expertise and you will find that the process becomes much more predictable and enjoyable.
JEFFREY BAKER is a principal with CresaPartners in Philadelphia. He can be reached at (610) 825-2292 or firstname.lastname@example.org.