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
[email protected].