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To Buy or Not to Buy: That Is the Developer’s Question

To Buy or Not to Buy: That Is the Developer’s Question

As land costs continue to rise in urban areas, developers are focused more than ever on assessing the financial viability of their potential projects at a very early, pre-acquisition stage. Savvy developers recognize that developing a conceptual design and associated conceptual budget at the very beginning of the due diligence stage enables the development team to quickly assess the design and construction cost aspects of the potential development—and, if need be, look at design alternatives that will adjust the cost. Because survey after survey has indicated that the current trend of increased costs for site acquisitions and project development is prevalent, engaging a qualified builder with demonstrated project-specific experience, local knowledge, and strong estimating and pre-construction capabilities is key to receiving reliable data and feeling confident about the pro forma that is created.

The general contractor’s estimate of project costs for a specific conceptual design on a specific project site provides an important portion of the data needed to determine whether the cost to develop the project allows the desired return on investment to be achieved. The earlier in the due diligence period the design is created and the construction cost is estimated, the more time the development team, architect and general contractor have to evaluate the site opportunities and constraints and various aspects of the building design.

Should it be discovered that the cost associated with the conceptual design is high, the builder can offer suggestions as to what components of the design might be changed to lower the construction cost. With the developer’s input regarding essential design aspects, including which ones are open for discussion, the general contractor can provide suggestions for more cost-effective alternatives.

Some developers believe they can utilize a design previously developed for another project and assume that construction cost will be the same. Unfortunately, this is not the case. Every site is different, so while there may be aspects of a previously designed project that can be utilized for a new venture, it is important to understand that every project site is unique, requiring its own custom design and site-specific construction cost model. This is the only way to accurately develop the project cost model and assess the true pro forma.

Once it is determined that the desired design can be achieved within a construction cost that works for the cost model, and the development team decides to move forward with the site acquisition, many developers choose to continue working in a design-assist arrangement with the architect and general contractor. That way, the project cost can continue to be tracked and adjusted as needed. This highly collaborative arrangement most often yields excellent results.

In addition to budget development and estimating, as the building design is developed, a qualified general contractor can also provide pre-construction services such as building information modeling (BIM) and constructability reviews that guide the project and provide great efficiencies. The design and pre-construction process requires the consideration of numerous design and construction details that are vital to achieving the development’s programmatic, aesthetic and financial goals.

A number of developers of multifamily and mixed-use projects have recently called on Bernards to develop conceptual estimates for projects they were considering on sites in the greater Los Angeles area, including Hollywood, Studio City and the neighboring city of Long Beach. In fact, we have had two and three developers request conceptual estimates for the same three sites, utilizing different building designs, to determine if the site represented a viable development opportunity. In each case, Bernards produced a conceptual estimate based on the conceptual design they had commissioned.

In most cases, the multiple conceptual estimates done for these three sites with three different building designs led the developers to determine the project would not yield the desired returns and, therefore, they passed on the opportunity. The sites were just too challenging. The good news is that this has been the exception and not the norm for the projects Bernards has been presented with by developers for conceptual estimates and most often we have been able to work with the developer and conceptual design, massaging design elements as needed, to provide our developer client with a solution that enables the project to move ahead.

Steve Pellegren, DBIA, is executive vice president of Bernards, a commercial builder headquartered in Los Angeles and specializing in multifamily.

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