By Mike Myatt and Eric Johnson

There is little doubt that real estate development is becoming increasingly more complex. While professional real estate practitioners are familiar with the latest risk management strategies and industry best practices, the smaller or non-professional owner-user-investor is oftentimes not aware of all the potential risks that lie ahead of them when embarking on a new project.

While small practitioners or non-professional owners, users and investors may not be properly staffed or have the domain expertise to properly manage a project to expected levels of success, there is a veritable plethora of risk management options available to them.

The multiple disciplines of professional development management services (Owner’s Representation, Program Management, Construction Management, Project Management, Development Management, etc.) are often misunderstood and/or misapplied. Even if a sponsor engages the right service options in the right situation at the right time, selecting and managing the right vendor mix throughout the life cycle of a project can still be a daunting challenge.

Selecting the right development services firm to facilitate, administer, and manage mission critical project initiatives can alleviate much if not all of the typical frustrations that go along with development of even the most complex initiatives. The demand for professional real estate project leaders is increasing in all sectors.

According to industry surveys, the benefits of utilizing qualified development services professionals far exceed the cost. Project risk, timing, and cost are better controlled, and not utilizing experienced service providers can be far more costly than one might think.

Current industry studies are discovering that over 40 percent of all special projects are canceled before their completion, and 33 percent of the remaining projects are “challenged” by cost/time overruns or changes in scope. Together, failed and challenged projects are estimated to cost the U.S. economy at least $145 billion per year.

The following text will address steps that can be taken to enhance project control, thereby better managing risks and improving returns:

Adopt Best Practices
Surveys show that challenged projects are often staffed with individuals who lack the right skills, insight, and management focus. Effective service providers are trained to ask the right questions and act on experience-based instincts and leading industry best practices that recognize the critical priorities. This requires a proactive leadership style that has evolved from training and prior experience in the art of managing complex projects.

There is no shortage of horror stories surrounding projects that have resulted in extensive delays, cost overruns and expensive litigation when the right project team was not selected by the project principals. Many sponsors simply lack the requisite experience to put in place the right leadership, project team, and even contractual agreements. Too often, contracts are so poorly crafted that they become virtually ineffective in protecting stakeholders’ interests. By outsourcing development services to qualified professionals the project will automatically benefit from a best practices approach leading to a certainty of execution and increased project returns. 

Define the Right Project
The proper definition of project scope is critical to overall success. This means answering the right questions regarding market research, buyer/user profiles, pricing points, absorption, the development concept, financing (see below) as well as the “story” that is conveyed to the market. Critical strategic flaws that emerge as a project progresses are characteristic of challenged projects.

The lack of well thought-out business logic during project conception and planning dramatically contributes to cost overruns, schedule delays, poor execution and/or degradation of project performance. There is no substitute for the insight that comes from experienced professionals who know the pitfalls in managing the complexities of today’s projects.

Align Project with Current Capital Market Conditions
Improper or inadequate financing can at a minimum hinder project returns, or in a worst case scenario can cause a project to become a non-starter out of the gate. The capital markets always have certain asset classes that are in or out of favor. Asset classes in favor receive more aggressive pricing and sizing allowing sponsors to lower the overall blended cost of capital while lowering the sponsor equity requirement.

Conversely asset classes that are out of favor may attract less favorable financing increasing the sponsor equity requirement, or in a worst case scenario may not be financable. To maximize a project’s success much emphasis needs to be placed on the financial engineering of the project in the early planning stages to make sure that the project capitalizes on the supply-side metrics currently in play in the capital markets.

Adopt the Mentality of Change Leadership
Surveys show that challenged projects are plagued by too many surprises due to poor planning and inherent conflicts of interest. Sponsors who wish to advance a project may not plan enough time for conducting proper due diligence efforts or fatal flaw analyses before proceeding. The judgment and objectivity of experienced professionals are critical when proactively assessing and developing program requirements that succeed in the marketplace. With challenged projects, managers and consultants often tend to be more reactive, so strategic issues are not objectively analyzed and requirements are not clearly evaluated. As a result, projects languish or become ill-conceived.

In complex and rapidly changing environments, requirements tend to evolve abruptly. Prepare by staying ahead of change. A quality real estate services provider also needs to be a change leader. Challenged projects overlook this factor. It is the stakeholders who often absorb the consequences of poorly managed change. A real benefit professional project leaders provide their clients is an ability to better anticipate and manage change opportunities before they turn into expensive change orders or even worse litigation. This requires systems and procedures that are proven, effective, and well managed. Employing inadequate control systems can quickly derail a project.

Implement a Balanced Leadership Style
It’s not enough to do things right. It takes doing the right things. Great leaders tend to think strategically. They possess a skill of thinking horizontally which involves instinctive abilities to analyze the available options and choose the right course of action. Project leaders need to stay focused on core strategy and issues, but they also need to execute, and this is where thinking tactically is critical. Project execution is about thinking vertically and delivering results.

Smart leadership balances both strategic and tactical thinking skills. It starts with assembling the right team and recruiting the right people to lead and execute. The art of smart leadership is recruiting talent who can take a vision, chart the right path to success, and possess the professional discipline and experience to develop solutions that work. Like solving a puzzle, success comes from experience, knowledge, objectivity, insight, asking the right questions and delivering the right results.

Select the Proper Vendors
Aside from the obvious requisites such as experience, pricing, etc., the key to engaging the right firm is defining the relationship in such a fashion that there are no conflicts of interest and that the services firm’s loyalty and fiduciary obligations are to the owner and no other third party.

 Much like an algebraic formula that isn’t solved due to getting the order of operation out of sync, one of the most commonly made mistakes by non-professional real estate practitioners is hiring vendors in the wrong sequence. Contractors, architects and engineers while talented professionals should rarely be the first vendors engaged. These professionals can add tremendous value to a project when carefully engaged at the right point in time to be part of a collaborative effort, but are not usually the best professionals to lead the project from the outset.

 Where possible best practices dictate avoiding the chaos and costs associated with the management of multiple vendor relationships. While few firms can truly provide a 100 percent organic turnkey solution, qualified professional services firms do provide many of the requisite skill sets needed to complete a successful project and where they need to bring in other vendors they effectively serve as a single point of contact for project principals in engaging and managing the nuances of third party vendors. A coordinated and collaborative effort from professionals who are used to working with one another will lead to better execution.

In conclusion, it has been our experience that when a sponsor will make the decision to engage a qualified professional services firm at the time a project is first being conceptualized, it is the single best form of insurance an owner can purchase.  SLDT