Owner’s Rep in Real Estate Development – Instrumental in Project Success
Steve Bentley is a high net-worth individual living in Los Angeles, CA. He has been making a good living for years running the family business that he inherited from his parents. Although, Steve considers himself to be a savvy investor, putting his earnings away in stocks, bonds, mutual funds, and the like, he feels that he needs to diversify his portfolio a little bit more. When the market went south in 2008, Steve’s returns on his investments did as well. After researching alternative investments, he has decided to get his feet wet in real estate. He knows a couple of people in the business and is aware of the potential returns of a successful development. He identified a parcel of vacant land near his home that he believes would be ideal to build a multi-family project on. Without really looking at any other properties or running any detailed financial projections on the development, he acquires the property.
Once the property acquisition is complete, Steve hires an Architect to design his vision. You see, Steve is under the impression that all he needs to complete this undertaking is an Architect and a General Contractor. The Architect is quick to alert him that there is much more needed for a project of this magnitude. Not only will he need his Architectural Services to design this 42-unit stick-frame condo structure over podium parking, but he will also need a Planning Consultant to get the project entitled through the governmental authorities; a Structural Engineer to design and engineer the structure; a Civil Engineer to design all of the site utilities and earthwork since his parking has to run subterranean; a Geotechnical Engineer to perform tests on the soil which the building foundation will sit; an MEP Engineer to design and engineer the mechanical, electrical, and plumbing systems; an Interior Designer to design the finishes of the residential units and common areas so they are saleable; a Landscape Architect to design the outdoor hardscape and landscape; an Acoustical Consultant to make sure the sound transmissions coming into the condominiums are code compliant; a Waterproofing/Roofing Consultant to make sure the building design does not allow any water infiltration that could potentially lead to future lawsuits; an Elevator Consultant to design the elevator system; a Building Insurance Inspection Consultant because the insurance provider requires them for condominium work; and since this project is in a neighborhood that is trying to lobby for lower density, he even needs a Political / Community Outreach Consultant to deal with opposition of the local Not in My Backyard (“NIMBY”) contingent.
Steve knows that he is not certified to do any of this work on his own and does not want to get sued for a construction defect in 10 years. As such he decides to hire all of these entities but doesn’t know how he can possibly manage all of them. Steve has no experience in construction, let alone design and engineering. Additionally, he has blown through his budget for soft costs, which were essentially busted to begin with. As such, he decides to try and manage all of them on his own. Several months into hiring all of the consultants, as well as a General Contractor, things start to fall apart. The consultants are not producing their deliverables by the deadlines promised, the drawings reflect conflicting information, and Steve cannot even manage to get an appointment to submit the drawings into plan check with the city. The contractor forgot to submit his insurance certificate before mobilizing onsite and one of their workers was injured when performing structural excavation, city inspectors have already written several correction notices due to unsafe conditions, the contractor’s hard costs are getting carried away, not to mention they are submitting numerous change orders because there were so many holes in Steve’s contract with them. Everything is a huge mess and Steve needs help fast. It is now apparent that he needs an outside consultant to rectify these issues and manage the project on his behalf. In hindsight, he should have brought someone on board, possibly even before he submitted his offer on the property.
Introducing the Owner’s Rep
Herein lies the need for the Owner’s Representative in the real estate / construction industry. The Owner’s Representative, also referred to as the Owner’s Rep, OR, or simply Project Manager, is sometimes an overlooked asset that can be included in any project undertaking. The Owner’s Rep bridges the gap between ownership and all other entities involved with the project. They control the design and construction process, making sure that every decision is made in the Owner’s best interest. A true Owner’s Rep is well versed in development as well, managing the entire development process and not just design and construction. More often than not, an Owner’s Rep has a background in development themselves, so they know what it takes to pull off a successful development project and maximize their client’s Internal Rate of Return (“IRR”). In turn, the Owner’s Rep can use their ownership experiences to solve problems and offer creative solutions that directly affect the bottom line.
As one can see from the litany of tasks mentioned earlier in Steve’s case, there are a myriad of moving parts to a development project, many of which may be a daunting undertaking for most small property owners to handle on their own. If the Owner chooses, the Owner’s Rep can manage every aspect of the project, ranging from approvals to lease-up, something that individual Contractors or Consultants don’t have experience handling either. Hiring an Owner’s Rep is crucial and will allow the Owner to focus their time and resources on more important issues.
A very experienced Owner’s Rep can even be brought on before the acquisition of the property, to help the Owner with things like property selection, acquisition analysis, economic studies and due diligence. They may also provide financial support, assisting in the identification of various forms of traditional and non-traditional financing sources and then help evaluate and analyze each of the options. The compilation of feasibility reports may also be necessary for decision making and reporting to various partners such as equity, banks, and appraisers, which include market research, detailed financial analysis, entitlement summaries, and justification for “go/no go” decisions. The Owner’s Rep may also put together and update the project pro forma and even lead the project through the typically complex entitlement process, providing coordination with the city officials, land-use attorneys, and Architects involved.
When it comes time to start the design process, the Owner’s Rep will assist in selecting the design team, typically at a minimum consisting of all of the players mentioned in Steve’s project above. They may create and issue a formal Request for Proposal (“RFP”) to go out to several different firms, or they may rely on past relationships to select a firm that best suits the particular project. Once the project team is formed, the Owner’s Rep can lead the effective collaboration towards a common goal. Again, the Owner’s Rep is typically involved in every aspect of the process and spearheads the flow of information among Architects, Designers, Engineers, Planners, Consultants, Contractors, Vendors, Property Managers, Sales Staff, Lenders, Governmental Authorities and of course, the client. Due to the number of players involved in the process, the Owner’s Rep should have a commanding influence to lead this synchronized effort to crystallize the design concept so that it can be built in the field. This point in the project is the ideal time to start exploring/visiting the value engineering possibilities. Value engineering is a technique in which the value of a system’s outputs is optimized by crafting a mix of performance and costs. In most cases this practice identifies and removes unnecessary expenditures, thereby reducing the cost. The Owner’s Rep should work with the consultants to remove these unnecessary costs and put the money in places where it should be spent.
This may also be an opportune time to perform a LEED analysis if the client wishes to go in that direction. The Leadership in Energy and Environmental Design (“LEED”) Green Building Rating System, developed by the U.S. Green Building Council (“USGBC”), provides a suite of standards for the environmentally sustainable design, construction and operation of buildings and neighborhoods. Several Owner’s Representation firms have LEED Accredited Professionals (“LEED AP”) on staff, which have the capability of analyzing a design and driving it to LEED certification.
The Owner’s Rep may prepare and maintain a Master Cost Report if the client so chooses, which includes the hard and other related development costs, such as acquisition, design & engineering, permits & fees, legal, FF&E & OS&E, administrative, sales, and marketing costs. This budget should include allowances for any anticipated cost exposures.
Prior to construction, the Owner’s Rep can interact with the proper authorities who have jurisdiction to secure the necessary project approvals and permits. Having the design team do this alone may prolong the process as they do not exhibit the same urgency due to their lack of ownership in the project. Many times an Owner’s Rep is needed to facilitate this coordination effort in a timely manner. They will also orchestrate all of the contractor bidding and trade buyouts. Whether the plan is to use a General Contractor, several prime Contractors, many direct Subcontractors, or any combination thereof, formal RFP’s should be issued and sent to at least three different contractors for each trade to ensure sufficient coverage through competitive bidding. All returned bids should then be thoroughly vetted and a comprehensive bid comparison presented to the client prior to awarding any contract. After this “apples-to-apples” bid comparison has been compiled for a particular trade, negotiations will commence to establish a complete scope of work that is cost effective.
Many times, in order to save costs, materials and equipment may be bought directly through a purchase order to the client. Similar to the trade work above, pricing should be obtained from at least three vendors to ensure sufficient coverage through competition.
The Owner’s Rep should prepare and maintain a Master Construction Schedule which incorporates all construction activities, procurement, material lead times, submittal lead times, approvals, permits, inspections, tenant relations, logistics, sales, marketing and turnover to the end-user. Weekly meetings should typically be held with the General Contractor and Subcontractors to review three-week or six-week look-ahead schedules.
The Owner’s Rep should also maintain a working history set of all project documents in the field, including drawings, specifications, requests for information (“RFI’s”), submittals, sketches (“SK’s”) and all relevant tracking logs. Every RFI response needs to be posted onto the drawings to ensure not only proper quality control in the field, but also a complete set of as-built drawings that can be turned over to the client at the end of the job. Additionally, the Owner’s Rep should review and provide insight to every submittal, RFI and SK that comes through to make sure everything is warranted and properly clarified. In addition to document control, the Owner’s Rep should also provide quality control in the field. In most cases a Superintendent should be part of the OR’s staff, walking the job every day, from start to finish. This supervision is key to having a successful project that is built per plan and spec. It is also imperative to have a Superintendent to manage the field labor so that manpower stays at a consistent and productive level.
The Owner’s Rep should make sure that each contract carries a complete scope of work in order to minimize the amount of change order requests coming in from the contractors. When they do arise, a thorough review and negotiation will take place to determine the validity of the request prior to approval.
The OR’s superintendent should work with the Contractors as they prepare and go through the many inspections required by the authorities having jurisdiction during the construction process with the end goal being to receive final building certifications.
As invoices, or monthly applications for payment, come in from the Contractors, the Owner’s Rep should review prior to recommending payment to client. It is beneficial to work with each of the Contractor’s in preparing their schedule of values during contract negotiations to maintain a proper breakdown and format that is consistent and comprehensive for the client during billing. During these billing periods, the OR should also request and gather all conditional and unconditional waiver and release of lien forms from all Contractors, Subcontractors, and Sub-Subcontractors for progress payments and final payments. If payments are made correctly, this will protect the client from having mechanic’s liens recorded on their property.
Every month, as part of the Master Cost Report, a complete cash flow analysis and draw schedule should be updated and presented to the client, projecting costs on a month-to-month basis so that the client has a clear and realistic schedule of anticipated expenditures and bank draws. This service can range from general oversight and direction as to timing the cash with request, and move all the way to full control of the project’s cash management in a fiduciary position.
As construction nears completion, the Owner’s Rep should provide a punchlist of all completed work. A punchlist document will be generated listing those items of work which have been observed as incomplete or requiring correction. The contractor then finishes the items on this list before Final Completion may be declared and final payments authorized. Also, near the end of the project, the OR will gather and compile books of all applicable product manufacturer and workmanship warranties, along with all applicable operations & maintenance (“O&M”) manuals for the end-user. In residential construction, these can be put together to be turned over to the individual homeowner, the homeowner’s association and/or the property management firm.
For a residential project, one must be cognizant of the Department of Real Estate (“DRE”) requirements. The Owner’s Rep should be involved with all DRE Filings, creating an itemized checklist of all relevant requirements and then tracking each of these items to ensure that nothing slips through the cracks as a project approaches its various tract map and condo permitting processes.
Some Owner’s Representation firms may have the staff and experience to aid the client with sales, marketing, and/or lease-up, either directly or indirectly by providing oversight. They can help identify a competent and appropriate sales team and establish sales and marketing strategies to be used for the project. Particular importance should be placed upon helping the client devise a sales and marketing campaign which helps the project differentiate itself from the competition and attract the right type of customer to the sales team.
If there is a “for-lease” component to the project, an Owner’s Rep may be able to source and procure various potential tenants for a client, as well as negotiate the terms of their lease. A savvy Owner’s Rep can provide a detailed lease analysis, abstracting and reporting in-place or proposed lease documents, making sure to identify the major deal points and lease clauses which impact the financial results and flexibility of the project.
In broad terms, the Owner’s Representative will be the direct representative of the client, spearheading all aspects of the job and recognizing and solving conflicts. When complex issues arise, they will explore all options available, distill the information, and provide the client with a concise set of options, clearly defined, along with a recommended course of action.
To reiterate, the Owner’s Representative is a critical team member to any successful real estate development project. As noted earlier in Steve Bentley’s case, poor decisions can easily be made by property owners simply because they do not fully understand the issues at hand and have experience with the processes. Sound advice to any property owner or prospective property owner looking into any type of development venture is to consider including an Owner’s Rep on the project team. More times than not, the client will discover that the time, money and hardship saved by having an Owner’s Representative involved will more than pay for the OR’s fee.