Tuesday, May 28, 2024 May 28, 2024
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Architecture & Design

Don Powell: Bending the Real Estate Risk and Reward Curve

Maybe it's just a sign of the times, but recently, my business associates and I have jib-jabbed about the short-sightedness of developers who are getting started on new projects, but who often hesitate to call an architect because we're perceived to be too expensive or unwilling to speculate.
Don Powell

Maybe it’s just a sign of the times, but recently, my business associates and I have jib-jabbed about the short-sightedness of developers who are getting started on new projects, but who often hesitate to call an architect because we’re perceived to be too expensive or unwilling to speculate.
Historically, attorneys and civil engineers have not provided pro-bono work, but architects have. In most cases, the architect is paid a small fraction of the actual value of up front services, or in some cases not at all. We understand that there is a need to minimize the developer’s out-of-pocket expense, but we want to engage as early as possible and routinely become in essence, an investor, speculating 5 percent to 10 percent of the total design fee in order to help make the project become a reality.

As architects, we must constantly ask ourselves, does that investment make good business sense and does the developer recognize our contribution as valuable to them? We trust that it does and they do. That’s when we view our relationship with the developer as a partnership. The development partner can reward our risk-taking through allocating slightly higher architectural fees once a project becomes a reality, providing a seat at the pie-cutting when the project is ultimately sold, or by offering consistent on-going work to help stabilize our practice.

Consequently, architects have to agree upon how much risk is reasonable based upon what the reward can be and try to choose our development partners very carefully.

It is that developer-design team partnership perspective that seems missing as I read Chuck Dannis’ Oct. 3 RealPoints blog, “Why Real Estate is Cool.” Mr. Dannis offers to incoming SMU Cox School of Business Scholars a simple 10-step example of how cool it is to be in the profession of real estate development. Starting with land speculation, leading to site acquisition and construction of a building, and culminating in the sale of a stabilized asset, his example highlights the profit-taking milestones along the way. Profit is cool, and it makes all of us smile. One of his assertions is that there is a correlation between risk and reward. That is not always the case.

In Mr. Dannis’ example, the developer engages in a “hiring spree” for an attorney, architect, and engineer after the land is purchased. That line of reasoning is completely foreign to the notion of managing risk. Remember the old saying that “an ounce of prevention is worth a pound of cure?” The developer either skipped some very important steps related to site investigation, which is an enormous risk on his part, or he must have leveraged his way to secure those services on the back of an architect, attorney, and engineer with whom no contractual relationship exists.

An alarm sounded in my mind as I read this. Are students being taught to consciously avoid or defer hiring professional consultants? Are they fully aware of the additional risks they may assume?

My assertion is that no developer dares to purchase land without proper due diligence. Can you imagine the developer telling his investors that the land that has just been purchased may not be used for the intended land use? Or that site needs to be re-zoned and the schedule for project delivery cannot be met? How about the investors finding that the developer utilized an architect who provided pre-design services on a pro-bono basis, but he blew the investigation and the investors have no recourse?

Proper due-diligence is the way to avoid disappointment and liability. Getting the architect, civil engineer, and attorney on board at the early stages of site consideration is critical. In response to Mr. Dannis’ 10-step approach, I hope that he will reconsider his formula for success. The items listed below as steps 4.1 to 4.9 are numbered to coincide with his 10-step outline, and they represent the basic information needed to make an informed land purchase.

• 4.1—Determine what authorities have jurisdiction over the land, including federal, state, and local authorities. Review subdivision ordinances and restrictive covenants.

• 4.2—Gather metes and bounds, topographic, easement, and utility information for the site.  Geological formations and protected vegetation may be noteworthy.

• 4.3—Review Zoning entitlements such as permitted land uses, allowable building height, lot coverage, allowable density (FAR), building setbacks, restrictions due to adjacent land zoning, overlay district Implications, impervious cover restrictions and protective tree ordinances, and parking and loading standards including screening. Determine if the current zoning is appropriate or whether a zoning change is necessary.

• 4.4—Review Phase One environmental study and determine the location of 100-year flood plain encroachment, if any.

• 4.5—Determine if the site is platted, which may lead to potential land taking for road widening. It’s a bummer to buy land and then have to dedicate it to a municipality.

• 4.6—Identify the appropriate building code requirements for construction, which impacts the placement of buildings.

• 4.7—Meet with the developer to understand their pro forma criteria for minimum building areas, floor plate size, core to glass depth, preliminary BOMA calculations proving the projected efficiency, sub-market adjusted influences such as above code parking required by a tenant or lender, or LEED certification goals.

• 4.8—Prepare preliminary site plan(s), floor plans, and massing diagrams or character sketch.

• 4.9—Finally, issue the architect’s opinion as to the appropriateness of purchasing the land for the stated purpose.

Beyond the pre-design services and preliminary design studies outlined above, architects can add tremendous value through enhanced marketing tools such as 3D imagery and website creation. We have to recognize that as a profession facing 30 percent to 40 percent unemployment today, we have to become more creative in the way we extract more of the value we create.

The purpose of my comments is two-fold. I want to encourage developers to engage architects at the earliest possible moment so that we can properly investigate and document development influencers. Secondly, like Mr. Dannis, we want to attract and retain bright young talent to our profession.

In order for architecture to remain a viable career, we have to earn a significant seat at the deal-making table and extract the value of our services more effectively.

Donald R. Powell Jr. serves as principal-in-charge of an architecture and design firm he launched three decades ago, now known as BOKA Powell. Contact him at [email protected].