Commercial Lending

The Impact of Interest Rates on Improvements
to Commercial and Industrial Projects

 

Thinking about designing and constructing a new facility during 2014? I’m recommending to my clients now that, in light of the current economic situation, they be extra careful in selecting and executing any sizeable projects.

This is a time for great gains…or great risks.

Check out this Wall Street Journal article by Constance Mitchell Ford:

“Capitalization rates, used by real-estate investors to measure the annual return of income-producing properties, declined for many property types in 2013, according to data from Real Capital Analytics in New York. Meanwhile, the spread between cap rates and yields on 10-year Treasury notes narrowed. The average cap rate for all property types was 6.74% last year, down from 6.76% in 2012. Cap rates fell fastest for office buildings, which had an average cap rate of 6.93% in 2013 compared with 7.15% in 2012.”  Excerpt from Wall Street Journal

So what does all this mean?

That’s exactly the question addressed by Brandon Wilhite in his recent blog:

“The recent movement in interest rates has left many property owners and investors wondering how cap rates (i.e. property values) will be affected.” “Whether it is a new development, an acquisition or a refinance, most leveraged transactions that made sense 60 days ago still make sense today. However, for the “core plus” and investment-grade assets that have been trading at sub-5% and even sub-4% cap rates (Net Operating Income / Purchase Price), many proposed transactions may no longer make sense.”

“The fundamental rules you probably learned in your first economics class apply: smaller pool of buyers = less demand = lower prices. In real estate circles, we often describe lower prices in terms of higher cap rates. In other words, the market is willing to spend less for the same net operating income. Now that interest rates have crept up, a reasonable assumption would be that cap rates will surely follow as would-be sellers are forced to either recalibrate their pricing expectations or to pull their properties off the market – depending on their investment/hold strategy.”  More Of Brandon Wilhite’s Article…

What does this mean for the typical tenant contemplating a new acquisition (lease or purchase) or just expanding their existing facilities? It means that to avoid disaster you must be thrifty. Or at a minimum, avoid irreversible mistakes in selection and hiring of design, engineering and or construction professionals. In an already soft market, with cap rates declining, it’s more important now than ever that you cover all of your bases as you implement your next project. And no time is more important than the initial phases. Experienced users of commercial and industrial properties know all too well that 80% of the risks of additional costs or delays are baked into decisions and hires that occur in the first 20% of the project timeline.

Find yourself a widely experienced project leader with demonstrated expertise at getting the best value and protecting you from risk. And follow his advice.

Additional Reading, click here.

 

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Architect’s guide and tools

Five Contract Scope Must-Haves
to Improve Profitability and Reduce Risk

The best contract is the one you never have to refer back to. On the other hand, if you ever do, it won’t be for a nostalgic trip down memory lane. It may the one and only indisputable basis or reminder of what everyone had agreed upon when they were playing nice together. With that in mind, clear and transparent communication up front is key for increased performance and decreased risk.

As a project leader and fierce advocate of the importance of transactional drafting (writing contracts and contract scopes), I find that there are enormous opportunities with the one pivotal document that links and describes the input and output of critical project team members in the real estate improvement supply chain.

Very rarely do contracts used in the architectural, engineering or construction industry fail because of legal sufficiency. And this is not intended as a substitute for good legal counsel. Instead, this is a shorthand summary of issues that I find give consumers of architectural, engineering and construction services the most grief or that are the most misunderstood or overlooked.

1. Scope: How much detail is enough?

Every contract divides the risks and benefits of the transaction between the parties. Whether it’s for architectural, engineering or construction services, the scope is the meat and potatoes of the contract. On one end of the spectrum, I’ve seen design services agreements that are like pastries: light, fluffy and without much substance. On the other hand, I’ve been involved in contracts that were better described in terms of weight than the number of pages.

What goes in the contract scope is often a function of who is doing the writing. As a project leader in the real estate development industry (site acquisition, architecture/engineering and/or construction), I am almost exclusively in the position of advocating for a client-consumer that is seeking to design and construct (or, if it’s a new greenfield project, building up) – their new or existing facilities. As such, I draft scopes that ensure vendor performance, close the holes in the description of work and insulate my clients from unnecessary risks.

In my view, the contract scope should be able to pass a three prong test. Protect the owner from risks (i.e., change orders). It should prevent disputes or misunderstandings by clearly communicating to both parties (good communication and transparency is key). Lastly, it should be broad enough such that there are no gaps in performance between the architectural, engineering and construction team.

2. Risk: How well are you protected?

A poorly drafted scope section of a contract is the “Welcome” sign for additional costs and almost limitless risks.  On the other hand, a well crafted scope is also the greatest opportunity for proactive cost controls and risk avoidance.  This is so for two reasons: (1) the contract drafting–whether it’s for design or construction services–naturally occurs before any work is performed. This means there is an invaluable window of opportunity to build risk protections into the agreement, and (2), this window opens early in the overall project life cycle so that in combination, this one-two punch gives users and project leaders an unparalleled opportunity to apportion risks, control costs and define deliverables before the risks arise and the costs are incurred.

3. Exit strategy: Getting into an agreement is the easy part.

Every agreement should be constructed so that the parties can exit without undue angst or pain. This is another area that is woefully overlooked. As a professional project leader and advocate for tenants, investors, and users, I’ve found that being able to pivot and exit an agreement or change vendors without undue costs or risk is critical to the success of a project. However unsavory it is to contemplate, some business arrangements need to be terminated. If the agreement provides no guidance as to how this is accomplished and how the handoff of deliverables and the payment for past work is taken care of it creates a recipe for disaster. Sadly, a few vendors will actually rely on a user, investor or tenant’s inability to terminate the agreement. Every agreement should have a clearly understood and clearly communicated exit strategy for either party; including exchange of deliverables that ensures the continuity of the project.

4. Change orders: the only constant is change

Change orders are always an unwelcome surprise. Setting aside the unanticipated, budget busting, additional capital costs piled on to what is probably already a project at its budget limits, many contracts fail to articulate the formula or calculation by which a change order is calculated. This opens a Pandora’s box of issues.

What costs can the vendor include with a change order? Administrative costs? Overhead? Profit? How much profit?  How is profit calculated? What about mark-up on materials? Setting aside all the potential component parts of a change order, like insurance, overhead, administrative costs, supervision, materials and God knows what else, what determines (or better said, what limits) the amount of markup? The answer is, without some experienced forethought, not much.

I recently completed a large manufacturing project that unfortunately was subject to a sizable amount of change orders. In doing our review of change orders, we discovered that they included startlingly high material cost. After much back and forth, we determined that the contractor’s subcontractor was using an arbitrary industry-invented material costing formulation. There was no basis in actual costs. Worse yet, the contract was silent as to how change orders were to be calculated. So don’t leave this area to chance. Set forth precisely when, how, and the calculation for all conceivable project change orders.

5. If it’s not in writing, it doesn’t exist.

This section may seem blindingly obvious. However, underlying the four points above is another axiom of good scope drafting. And that is everything about the scope and the agreement between the parties must be in writing. When in doubt, write it down.

In the same way that “good fences make good neighbors,” contracts that are expertly drafted, transparently negotiated and communicated with expert professionals ensure efficient, effective and cost savings between users and expert vendors.

A legally sufficient contract is a fairly basic undertaking. But don’t go it alone. Align yourself with an attorney or other subject matter expert who can skillfully help you navigate beyond the terms and conditions or legal sufficiency of the agreement and ensure that tactically and substantively the contract acts as not only the glue binding the input-output of the participants in your project, but also as a crucial communication tool and barrier to insulate and protect the user from unknowns or unbounded costs that are best put in the court of the expert professional. Do this, and you’ll be well on your way to building success into your next project.

Tom Conzelman is President of Apex Project Consulting, Inc., a full spectrum project development and construction management consulting firm for commercial, industrial, healthcare and retail projects; both locally and across the United States. Mr. Conzelman is a licensed electrical contractor and general contractor (www.apexpjm.com).  In addition to various project management credentials, Mr. Conzelman graduated law school from Western State University, College of Law and has taught Contracts-for-Contractors at the college level.  This not an offer or attempt to provide legal advice.

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Video conference

Video Conferencing: The virtual project team is here now.

 

Are you using video conferencing as a major tool in your meetings arsenal? You should! Technology has made video and online meetings one of the best ways to upgrade meeting efficiency and effectiveness while driving down costs.

Imagine. No more wasted windshield time, fighting traffic, going to hour(s)-long in person meetings, and then driving back for another hour. Online meetings and conference calls are immediate and convenient whether you’re across town or across the globe.  This means the experts and professionals attending these meetings are much more efficient and thus less costly.  And this cost savings flows back to the client.

With online meetings and conference calls, there’s an infinite amount of data you can share depending on how deep a dive you want to take or how the meeting topics change.

And frankly, it’s just more interesting. You can draw on the screen and point or circle the part you want to highlight for everyone’s benefit. No more leaving any doubt with your team as to what part of the floor plan the project leader was referring to when you said “the office in the NW corner.”   Plus with the benefit of being able to share screens with participants and the ability to add video guarantees you’ve not only thoroughly communicated with the entire project team but enhanced understanding and retention.

So how do you make your video conferences as effective as possible? Jill Conrath is an author, speaker and business strategist who uses video conferencing as well as anyone I’ve seen. She gives these tips:

Mistake #1: Technology Screw Ups
If you’re like me, using new technology is not second nature. I freak out when things go wrong. To ensure that doesn’t happen, I practice ahead of time with safe people who will still love me even when I’m a total loser. Or, I rope in a savvy geek to give me step-by-step instructions.

Make your mistakes before you go live – or risk embarrassing yourself.

Mistake #2: Unwanted Interruptions
After my husband barged into my home office during an important online meeting, I realized I needed to do something. Today, my office has a huge “Do Not Interrupt” sign outside it when I’m online.

Make sure you shut down text message and email too. I’ve heard horror stories about what’s popped up at a most inopportune time.

Mistake #3: Inappropriate Looks
If you’re using video meetings to create a personal connection, then doggone it, you need to be looking people in the eye. Obvious, yes. But when you’re talking to someone online, I’ll bet you’re looking at where their video shows up on your screen — which may be in the lower corner.

Make sure to move their smiling face right up under your camera. That way you’ll be looking directly at them – not at their navels.
More Jill Konrath at jillkonrath.com

In every project lead, I always make video conference and online meetings a critical tool for for conveniently staying in touch with every member of the team and ensuring that I’ve communicated and achieved a uniform understanding of all the topics covered with each and every team member. Simply stated, we get more done, there’s better understanding and consensus than with simple phone calls. And everyone’s schedule is more efficient because no one has to travel across town or across the country to make the meeting.

How about your company? Let’s hear your thoughts about how video conferencing is being used to save you money…or conversely, how it’s costing you because you don’t use it yet. Please leave your comments below.

 

 

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Construction project

Commercial Properties: Choosing Right

As a project leader, I often get called into the very earliest stages of company moves and purchases, especially those where new construction or renovation are involved. Over the years, I’ve found a few tips you may want to keep in mind.

First, if you and your broker are negotiating on a piece of commercial real estate and you get an inadequate offer, don’t dismiss it out of hand. You almost never get the most optimal deal in the first offer. I’ve seen a few company owners steam out of the room as though the offer were an insult. Expect a low deal, then start negotiating. That’s just the way these deals work.

Next, be sure to pay close attention to all the documentation and paperwork. You’ll be required to guarantee the accuracy of any document files you’re called upon to present (such as company financials). If you do not have all the appropriate files, loan providers will not likely give you the financial package you need to buy the property. File and collect all the essential files ahead of time.

Be a savvy entrepreneur. When considering commercial real estate opportunities, make sure you are getting exactly what your company needs call for. Don’t “settle” for less than the optimal facility for what your company really needs. And if you find a property that falls short of your goals, with inadequate amenities, the wrong dimensions, etc., make sure you can afford to fix it so that it does meet your original requirements. If the deal doesn’t make sense, move on to the next one.

Most importantly, don’t overlook the fact that your new facility is subject to local zoning ordinances. Be sure your architect takes that into consideration as he suggests upgrades, expansion or other changes to the original facility.

Check every aspect of the property so you understand you are getting exactly what you had in mind. Don’t rush into a purchase you may one day regret.

Get your staff and trusted allies involved. Ask their opinions. Put an actual value upon the new facility in terms not only of its real estate value, but its value to your company. Will you be more productive? If so, what’s that worth? Does that make the size or price of the new facility more palatable…or less so?

Fresh and independent point of views can give you a clear view of the amount of others think the new facility is worth. You might discover that you are paying too much, or that your real estate representative is over-estimating the value of the property or under-estimating the cost of converting it to your needs.

Choose that property carefully. Don’t get emotional about it. Ask trusted advisors for feedback. Do all of that and your chances for a successful project are higher right from the start.

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A carpenter on site

Report: January Jobs Picture is Brighter

Things are starting to look a bit brighter for jobs inside the construction industry. News articles report the highest construction worker employment rates since July 2009.  Read more

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Project Management Solutions

Project Management: How To Shave 15% Off The Cost of Your Next Project

No doubt you’ve heard the old saw that ignorance of the law is no excuse. In project management, the same principle applies to the design, construction or expansion of your company’s facilities. What you don’t know could really jeopardize your project’s success, if not prematurely change your employment status.

There are several solutions. Here’s one:

First, start with some simple self-assessment. Setting aside phenomenal growth industries, most companies won’t attempt building new or expanding existing facilities more than once in the career of the average employee. This means there is no institutional knowledge or wise-sage that can guide the company through the complex, costly and risk laden process of engaging and managing design and construction professionals. This is an area where simple referrals won’t work.

Are you experienced enough to hire the experts you’re going to need for this project?

Architects, engineers and contractors come in many flavors. One thing all design and construction professionals have in common is that they’re experts, or at least seasoned veterans, at engaging with prospective clients while managing their exposure to risk and maintaining a fair profit. This is definitely not the same as saying that the above mentioned professionals have a win-lose mentality. That’s just not true. But shouldn’t the consumers of architectural and construction services be experts, too?

In other words, as the buyer of these servers, are you the expert you should be? And if you’re not, what are you putting at risk?

Do you have a solid, empirically based process for examining the capabilities and expertise of the design and construction professionals you’d like to hire? Too much is at stake to simply ask around for referrals. Relationship-based decisions are almost always correlated with poor results. To be successful, and to save money, you need a reliable, proven process that aligns the most efficient and capable professionals to the goals and objectives of your project.

I’m not referring to the various “delivery” methods like design-bid-build, design-build or CM at risk. I’m addressing the need for an evidence-based process for selection of the best fit design or construction team.

For example, this process should address:

  •  What can be expected to happen or be needed but is not included in the proposal?
  • What other vendors are involved that the design or construction professional doesn’t have control over?
  • What risks will be considered unforeseen or not determinable?
  • How will these risks be identified – and mitigated?

Do this phase of your project correctly and, in my experience, you’ll save at least 15% of the costs of your entire project. Do it incorrectly and you could risk losing much more.

For best results, I suggest the following: hire a broadly experienced and highly qualified project manager before you hire anyone else. That’s right. A good project manager can help you find the best architects, engineers and contractors. He’ll choose based upon how good these experts are, how deeply experienced, and how good a fit they are for you and your company.

He’ll choose without the emotion attached to “referrals from friends.” He can help you through contract negotiations, examining not just the proposals but the contracts associated with them. He’ll help you avoid problems you didn’t know you had. He’ll push ahead even when you’re busy with other tasks. He’ll save you time. Most importantly, he’ll save you at least that 15% I mentioned above. And he could save you much more than that.

Let me leave you with this one last thought:

Success or failure hangs upon your ability to handle these first critical steps. It’s baked in. Your alignment with the right expert design and construction professionals is central to that first step. You can go it alone—and face enormous risk—or you can get someone on your team who has the proven ability to ensure that you’re partnered with the right A&E and construction team.

Want to know more or just want to sleep better? Call me.
####

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Construction project

Construction Workers: The Labor Shortage Continues

What makes a successful hire?

One of the ongoing challenges to the construction industry–and therefore a concern to any business planning to build new offices, warehouses, factories, etc.–is the ongoing labor shortage of qualified construction workers.

Young people are not entering building professions in the numbers they used to. So with a smaller labor pool, where are contractors finding qualified candidates to fill their open positions?

Here’s an interesting article from Construction Informer Blog: http://constructioninformer.com/2014/01/13/construction-employers-new-hires-guidelines/

Where are managers finding new talent? Nearly 80% report using online recruiting tools, while 68% offer incentives to employees who refer someone. Sixty-three percent use internships or co-ops, and just about the same amount, nearly 60%, use professional recruiters, external referrals and job postings on company websites.

Respondents also weighed-in on what educational backgrounds had proven to be most successful in new hires. Regardless of whether the new hire was management or trade/craft, respondents said they had the best luck with people having construction management education or engineering.

The top personal skills named by the respondents that were predictive of a successful hire were communications skills (named by 23%), leadership (17%), and strategic thinking (11%). Two of those, communicating effectively and strategic thinking were named as the most difficult to develop in field managers, followed by coaching and mentoring. For project managers, respondents said the most difficult to develop were communicating effectively, strategic thinking, leading others and coaching and mentoring, in that order.

This problem with finding skilled labor is just one more reason you have to be very careful when  you hire contractors. Inquire into the skills and experience of your contractors’ personnel. Better yet, have your Project Manager, who knows just the right areas you should be concerned about, to handle hiring of contractors for  you.

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Construction Image

Construction Site Video: Here To Stay?

Video cameras are everywhere these days. And now that they’re built into most cell phones, they’re even more ubiquitous than just a couple of years ago. Today, the increase in the number of construction site video cameras and the paybacks they deliver are almost as broad as the roles of people using them.

If you’re not already familiar with this trend, here’s a great article from ENR.Com:

http://enr.construction.com/images2/2014/01/enr01132014tech_mrmc.jpg

Mark Penny, a senior vice president for the Dallas region of Manhattan Construction Inc., says his company, a large, self-performing general contractor, has used many vendors, although it most recently has turned to EarthCam. “We have a lot of high-profile jobs that people want to see. They are a great opportunity for us and the client to showcase the construction, which makes the job of selling what we do a lot easier,” he notes.

Penny says the cameras can improve security, but “that’s not their primary use.” The photographic record also can verify that activities such as concrete placement are done on schedule. But, he says, “in the end, we have a time-lapse video that’s just a great wrap-up marketing piece. We have a lot of high-profile jobs that people want to see. They are a great opportunity for us and the client to showcase the construction, which makes the job of selling what we do a lot easier,” he notes.

Penny says Manhattan doesn’t use job cams for safety monitoring, either. “We have on-site safety guys. If we are doing that on a webcam, we may feel we are missing the mark,” Penny says.

Site cams do everything from showing project progress and quality control to showcasing sites that the project owner wants to share with his investors, board of directors or other key officers and officials.  Many project managers report increased productivity when cameras are in place, resulting in ROI’s many times the cost of the camera equipment itself.

What are the costs?  The article continues:

Hardware and plans vary from low-resolution off-line cameras that store images for retrieval to ultra-high-resolution units that have big zoom lenses and internet-operable controls. Users can vary shot frequency and pan, tilt and zoom, or PTZ, at will. The images stream to websites and storage systems. Costs vary from a few hundred dollars a month to $30,000 or more per camera per job, depending on the level of sophistication and service.

 

Are these cameras merely for show, or do they actually provide financial returns on the jobsite. Time will tell. We suspect they’ll be around for a long time.

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Football Stadium

Picking A Great Project Leader: Think Football.

An article caught my eye the other day about the similarity between a great project leader and a great football coach. The best project managers are usually the best planners. Same with football coaches.

Check out this brief article from Best Practices Construction Law:

Coaching football.
Successful football organizations consist of specialized teams or units: (a) the offense; (b) the defense; and (c) and special teams. Within those teams there is often a further specialization. For example, the defensive team consists of linemen, linebackers and secondary. All of these specialized units must plan and work together in order to be successful. In construction, the specialized units consist of crews headed by project engineers and/or foremen.

Planning the project.
After a contract is awarded, the contractor’s first task is to put together a project management team. The makeup of the team will obviously depend on the size of the project and the contractor’s field personnel. On a big project constructed by a large company, there may be project engineers. On a smaller project, there may only be foremen. The team may or may not have been involved with estimating the project. Once the team has been assembled, the project engineers and foremen must study the plans and specifications in great detail. The project engineers must consult with the estimators to learn how the estimators conceptualized and bid the project. Taking the estimators’ concepts, the project engineers and/or foremen develop a detailed, coherent work plan for constructing the project.

Only change I’d suggest in this comparison is that, in our experience, a well-experienced and properly credentialed project manager is needed to field marshal the entire construction process–including the hiring of the general contractor. The project manager is your man on the team. He keeps open communications with the contractor, pushes for deadlines, analyzes issues that crop up, and when he does his job right, saves you money and time on the project.

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