How do you handle all the risky stuff that goes into development?

Courtyard between apartments in New Town St. Charles Tim Busse - Architect.
Courtyard between apartments in New Town St. Charles Tim Busse – Architect.
Ahead of the Small Developer Boot Camp this weekend in Duncanville, TX, I have been thinking a lot about how folks outside the field perceive what it takes to be a developer, and how that perception departs from the reality.
People that are not developers often talk about the developer’s amazing and unreasonable tolerance for risk as a defining characteristic.  This is not correct.  Seriously.  The key thing to understand is that Developers typically see the risk of a project parsed into hunks, not as one big scary ball of risk and adversity.
A developer’s job is to identify risks in the stages along the arc of the entire project and then manage or mitigate those risks with the appropriate know how, relationships, time & attention, and setting up the right deal structure to align the interests of the parties.
Market and Site Selection Risk is managed by doing lots of homework before committing to a specific site or sites.
Entitlement Risk is reduced or mitigated by building as-of-right projects or by not closing on the subject property until entitlements are secured, and by thoroughly understanding the technical steps in the process, the politics of the place and the culture of the staff and neighborhood.
Construction Risks (including cost overruns and delays in completion) can be reduced or mitigated by not taking on projects with building types outside of the developer’s experience.  Podium Buildings are a different animal than wood frame walk-ups, Mixed use building are different from one story commercial building or walk up apartment buildings.  If you are making a move to a more complex building type, get a partner who has been there before.
Leasing Risks are managed by doing your homework on market preferences and competing projects recently built or in the pipeline.
Financing Risk can be reduced or mitigated by cultivating multiple sources for equity or debt and not being tied to one investor or just one bank.  Rookie financing risk can be reduced by getting mentors and advisors to review and critique your deal on paper several times before you put it in front of an investor or construction lender.  Structuring multiple exits for investors and for the developer reduces financing risks following construction and lease up.
The mechanics of managing risk can start with assembling checklists and standardized deal structures and agreements with consultants and trades.  With practice comes more mature perspective and a more intuitive grasp of what activity and risks should demand the developer’s attention at a given time within the project arc.

3 thoughts on “How do you handle all the risky stuff that goes into development?

  1. marcus hayes August 10, 2015 / 10:38 pm

    Very useful.

  2. Andrew Herrig August 21, 2015 / 6:13 pm

    Thanks for the great summary of risk categories. I know my concerns are in the site selection and entitlement categories as I’m at the stage of “I don’t know what I don’t know”.

    • rjohnanderson August 21, 2015 / 8:46 pm

      If you are at the stage where you don’t know what you don’t know about site selection and entitlement, triage your learning curve a bit by limiting your site selection efforts to sites where you would build an as-of-right project, no variances or exceptions needed, just a building permit. If the site selection process is a mystery, look for vacant or underutilized parcels in a part of town where you think things are going well or are on the way to going well. Is there a parking lot that does not see much use? May it needs a building at the back of the side walk. Will the zoning code and parking regulations let you build one there? Mark the site on a map or drop a pin on it in Google Maps and dig into the local zoning and parking rules. Now go find 4 more sites within a half mile and do the same. Walk or bike around the neighborhood, don’t drive when you are looking for potential sites. talk with local folks. Spend time in the local places for food and drink. If you need to pursue an entitlement, find a partner or a mentor to supplement your skill set.

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