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.