Real estate owners and developers know the difference between success and failure often depends on how well the costs are managed. For example, with construction costs in a typical deal accounting for 50% of the sellout value, every dollar in construction cost overruns degrades the bottom line by fifty cents. More often than not, the erosion of the bottom line can be attributed to a systemic failure to carefully manage the design and construction process, a lack of a precise scope of work generated at the outset, and/or a false expectation that a Guaranteed Maximum Price contract (GMP) was going to protect the owner from pricing risk.
The process of deriving a thorough scope of work, establishing a reliable construction budget, negotiating a construction contract and maintaining the integrity of the budget from inception to execution and through construction completion can be the single most important value-add an operating partner can make to the ownership entity.
That is why the key to successful cost control starts by joint venturing with an experienced operating partner possessing a track record of success and with the requisite skill set, including:
- Defining a complete and thorough scope of work
- Establishing budgets
- Implementing a cost-containment strategy
- Working with governmental authorities to secure approvals and entitlements
- Choosing the right design team and consultants based on the asset class
- Challenging the design team to increase efficiencies, floor plan flexibilities and deliver a fully delineated set of plans and specifications
- Value engineering
- A methodical bidding process that achieves the highest quality at the lowest price while mitigating the owner’s risk of cost overruns
- Executing and managing the construction phase
- Micromanaging costs and meeting or exceeding budgetary expectations of the deal
The Operating Partner must be experienced, nimble, resourceful and able to micromanage the design and construction process from project inception to completion. The OP should be willing to take risk and commit equity to the deal.
If the need is for a “boots on the ground” OP that advocates for the owner, thrives on doing the “heavy lifting” and is willing to commit equity to the deal, consider BDC as your joint venture partner for your next development project.
Baker Development Corporation’s Asset Maximization Program (AMP) is a viable alternative to a bank that is considering: 1) disposing of a fractured asset at distress values or 2) attempting to act as the developer and directly marketing to the public despite the stigma that a “bank sale” is a “distressed sale.” Instead of incurring a sure loss under either scenario or committing additional capital to complete the project by engaging a general contractor who is adverse to the Bank, BDC partners with patient lenders and property owners by stepping in as the intervening developer to provide a) new funds needed to complete the project, b) development expertise, and/or c) prestige needed to re-brand and re-market the property. The lender avoids throwing the proverbial “good money after bad,” the stigma associated with a “bank” or “distressed” property is removed and potential for a significantly higher payoff is breathed into the project.
Here is how the program works:
- A lender has an asset on the books, the value of which is impaired because significant construction work remains and the lender will no longer commit additional funds to complete the project.
- The lender and BDC enter into a partnership agreement that contemplates BDC committing the construction funds necessary to complete the project in exchange for a percentage of the sale proceeds.
- BDC takes the construction risk and guarantees the construction cost to the partnership.
- BDC rebrands and remarkets the asset and after recouping its investment, shares the sale proceeds with the lender pursuant to the partnership agreement.
Recently, BDC partnered with a well-known Chicago-based bank that had foreclosed on 16 town homes and 6 condos out of a total of 32 units. All 22 units were in various states of completion. The bank had an “as-is” appraisal of $4 million for the property. The bank entered into an AMP agreement with BDC and through a combination of BDC funding, rebranding, remarketing and completing the construction of the units, it is anticipated that the bank, in one year, will recover nearly $8 million — an almost 100% value-add through the AMP program.
If you are a bank who can afford to be patient, BDC will show you how we can make your patience pay off!
Many times developers and property owners are reluctant to pursue deals involving environmental issues due to the perception the deal will expose the property owners to unnecessary liability and prohibitive remediation costs. With BDC’s expertise as a brownfield developer, you have a development partner who knows how to mitigate those risks and manage the costs in a way where the deal becomes feasible.
BDC has redeveloped numerous hazardous and complex brownfield redevelopment projects including remediation of PCB’s, TCLP lead, asbestos/mold abatement, RCRA metals, BTEX and other volatile/semi-volatile organics. BDC’s expertise includes coordination with regulators, deriving a cost-containment strategy, implementing a construction plan and obtaining regulatory approval letters that feasibly address the environmental issues while simultaneously mitigating owner, tenant and lender’s risk.
BDC has a track record for success working with the following companies on brownfield redevelopment projects:
- DuPont Chemical Corporation
- Reichold Chemical
- Shell Oil
- Best Buy
- Harris Bank
- TCF Bank
- NCB Bank
- Federal Die-Cast
- Bank of America
Next time you encounter a deal with environmental issues, run it by us first. We might change the way you approach brownfield deals in the future.