FREQUENTLY ASKED QUESTIONS

From “Ask the Advisor”

How is land value determined for a Build-to-Suit?

Typically we work backwards from the overall project cost. When capitalized at a current market rate, the project will only support a certain amount of cost to be viable from a economic aspect. Assuming the shell, and tenant fit-out are within market benchmarking limits, the net reminder will be the cost of the land and site improvements.

How do excess site improvement costs affect the purchase price of land?

The site purchase price should be adjusted for on-site and off-site improvements which drive the cost above the benchmarked net value determined through a pro-forma analysis.

Why do projects have unforeseen change orders?

In short, the process is not perfect. With all the time and effort that goes into properly documenting the project scope, combined with the individual expertise of the project professionals, there are typically 3 reasons for change orders. The first is the result of coordination/communication difficulties between the project professionals and the contractor. The second is the result of unforeseen, or hidden, defects and construction related issues. The third is the result of the actions of jurisdictional agencies.

Are there ever any good change orders?

Yes. Value engineering opportunities created during the precon process often result in deductive change orders.

What should/could be done to minimize change orders?

First of all, recognize the process is not perfect. Each and every professional; on the team will strive produce accurate and fully coordinated documents, but there may obscured conflicts which do not surface until construction is underway. Also, as mentioned above, there may be hidden site defects, utility conflict issues, jurisdictional issues, etc., which are beyond the control of the [project professionals. Mother nature is another good example. To prepare for potential unforeseen change orders, and even those which are projected due to a client’s change in the scope, a project contingency is highly recommended. Also, sufficient time to prepare the documentations should be allowed. If time is of the essence, then special consideration should be given to the Design/Build process, which minimizes the risk of coordination between the professionals and the contractor.

Should liquidated damages be included in the construction contract?

If the completion deadline is one of those drop dead issues, then liquidated damages should be considered. However, the contractor’s should be made aware of this potential requirement during the bidding process, and be asked to price as an alternate for your consideration. Liquidated damages often have a cost impact on the project, and the contract will probably ask for a bonus in exchange.

Why are some real estate development advisors “Owner’s Rep’s”, and others “Tenant Rep’s”? Which one is RE/Group Development Advisors, Inc.?

Typically, real estate development advisors represent one side or the other of the real estate transaction. At RE/Group Development Advisors, Inc., we have a vastly different approach. As highly experienced corporate development managers, our team recognizes the expectations of both the landlord and the tenant, and the unique issues associated with each. We believe that understanding these divergent, yet parallel objectives creates a higher potential for project success. Obviously, if push comes to shove, we are the true advocate of our client. Having said all that, there have been many situations when we have been able to bring value to both sides of the fence.

Why should I hire a real estate development advisor like RE/Group Development Advisors, Inc.?

A real estate development or tenant fit-out project typically requires a significant sized team of processionals, consultants, contractors, and vendors. Although each entity is expert within their field, a development advisors understands the big picture, including the value creation process. By approaching a Build-to-Suit or large tenant fit-out project from the developer’s perspective, integrating the development/tenant fit-out process with real estate market knowledge, the development advisor is able to drive the process to create an asset which has fairway market value, asset flexibility, and enhanced long term operating efficiencies.