Continuing the project as-is might be necessary when you are
so far through construction that there is no viable alternative to make
substantial changes. You are trying to recover what you can or stop the
bleeding as much as possible. This is the case if you are working on behalf of
the lender who is trying to recover the outstanding debt on a project and the
discounted ‘fire-sale’ to get another developer
interested is too costly. So the funders decide to keep control and complete it
themselves. Alternatively, it could be that you have now acquired the project
at such a low cost that it makes it feasible to continue as-is.
When
continuing with the project in its current form you are taking on all the
positive and negative factors uncovered during your audit. Make sure you are
catching the knife by the handle and will confidently have everything under control
moving forward.
“Phoenix will, once again, rise from the ashes.” Author[1]
The project is ready for the taking. You have done your due-diligence, understand why the project has failed and have thoroughly audited all documentation and everyone’s status. You are comfortable you now know enough to take this opportunity forward. Your motivation is coined in the words of Sam Zell: “I was dancing on the skeletons of other people’s mistakes.”[2]Or you have no option anyway as you have been called in for the lenders (or whoever still has skin left in the game) to sort this one out! Either way, what has happened on this project in the past is history and now is the time to restart.
How you
restart will depend on just how viable the project is in its current form. Do
you continue with just a few tweaks or do you make some drastic modifications
or take a completely different approach? Broadly your options include:
Continue
as-is
Clean
up and dump
Renegotiate
and continue
Clean
slate and continue
Consolidate and segment
Restructure existing
Reposition
Re-plan
The approach may include a combination or even mixing elements from within each option. I’ll describe each option and constituent elements and leave you to pick and choose what meets the specific circumstances of your project. For a multi-stage, multi-dimensional development project in an ever-evolving marketplace you might find yourself embracing all of the above!
This series continues…
[1] I spent the Global Financial Crisis in Phoenix, Arizona — ground zero for the subprime mortgage enabled housing boom and bust. This quote was a title of a contrarian investment proposal I presented — to prepare for the recovery. But boy did the recovery for the asset owners take a long time.
[2] Bruck, C. (2007, November). Rough rider: Where will Sam Zell take the struggling Tribune Company? Retrieved from https://www.newyorker.com/ magazine/2007/11/12/rough-rider
Property development is all about persistence. You will never make it to the finish line (at least on time and on budget) without unwavering persistence in almost everything you do. Persistence is about challenging the status quo and not accepting mediocrity. Persistence is about persevering to find a better, faster, cheaper or more valuable alternative to the solution that is first presented. It’s persistence with people that is most important. Persistence to a point of course! It’s a fine line between being just persistent enough to achieve what you need and being a pain in the butt that paradoxically slows things down.
This series ‘Persistence Pays’ is my who’s who list to be persistent with and when you might need to restrain yourself.
Funders (Banks, Investors, Boards and Partners)
When dealing with funders (whoever holds the purse strings) my golden rule is to persistently communicate. Your new word is ‘Persistamunication’. You never know if you will need to extend your funding. A hiccup with construction or a slowing sales market could trigger it. Before you get in that situation, ensure you have a great working relationship with your funders, and that means talking. Communicate the good news in between typical reporting periods. Don’t hold back the bad news. Even if you are confident that you will fix some bad news before they need to know, consider telling the bank. When you do fix something that might have caused a scare (so long as your incompetence didn’t cause it), funders will gain more confidence in you. This is one group that will appreciate you being persistent on the project. So instil trust with your funders and show them just how hard you persist with everyone and everything to see the project through to the bitter end.
The moral of this section: Persistence has a pay-off. Without persistence, development projects can flounder and every day equals extra dollars.
Andrew Crosby +64 21 982 444 andrew@xpectproperty.com
Property development is all about persistence. You will never make it to the finish line (at least on time and on budget) without unwavering persistence in almost everything you do. Persistence is about challenging the status quo and not accepting mediocrity. Persistence is about persevering to find a better, faster, cheaper or more valuable alternative to the solution that is first presented. It’s persistence with people that is most important. Persistence to a point of course! It’s a fine line between being just persistent enough to achieve what you need and being a pain in the butt that paradoxically slows things down.
This series ‘Persistence Pays’ is my who’s who list to be persistent with and when you might need to restrain yourself.
Real Estate Agents, Sales and Marketing
If sales are going according to plan, then your real estate agents will be doing their job. Yes, they probably can always do better. And by better, I mean sell and lease faster and/or for more money. I am running out of letters to add to the word persist, but let’s call this one ‘persistasales’. Consider three circumstances:
In-house sales and leasing
External agents
Sales strategy change
In-house Sales and Leasing
With an in-house sales team persistence requires all the usual sales manager motivation, slash inspiration, slash training, slash lending-an-ear type responsibilities. It also means persistently encouraging (empowering) the team to find local marketing mechanisms rather than solely relying on head office. Gather regular feedback from those in the sales trenches and action the sensible ideas. It’s all too easy for sales consultants to default to wanting a price reduction. So being persistent is to continuously separate pricing incentives (freebies and price discounts) from marketing initiatives. When things aren’t working you try something else — don’t let the team stand still. When things work well, put more resource into that effort and persistently promote it to the in-house team.
External Agents
Often the external agent you use will not be solely dedicated to your project. The agency that engages you certainly won’t. An individual or three might be if they are part of a project marketing team. However, unless your project is substantially large, only juniors or showroom staff will be one hundred percent dedicated to your project. The main agents you engage to sell or lease your project will more than likely have other selling priorities. If your project does not create the highest number or value of transactions in a certain period, compared to the agent’s other activities, then their interest will wane. This is even if you offer a higher commission — because agents get intoxicated from making the sale. To many agents, a dollar now is more addictive than two dollars later. Moreover, external agents are in the listing business. They need to develop more listings to grow their commission base. And that means more clients competing with the attention your project deserves.
The short of it being you need to be the number one client to ‘your’ external sales and leasing agents. Invest your time in them, so they invest their time in you. Turn up the persistasales volume if it gets tougher to get transactions over the line. Emails, texts and phone calls won’t suffice, although you should be communicating this way at least every single day. Add to that a combination of coffees, lunches, dinners, events and parties. Don’t mistake this for stalking. These are the people responsible for your project’s income. It’s about making sure selling or leasing your project is always at the top of their mind.
Change in Sales Strategy
What happens when the market changes and your sales strategy no longer works? Well, you could go re-read Chapter Five ‘Fresh Image’. However, on the assumption you are almost at the sales finish line, but sales or leases are drying up and you just need to persist, then ask these questions:
Are your agents too well fed and now lazy? Ok, that might be a bit harsh and, let’s face it, realtors already get a lot of grief. A good agent is always on an aggressive look out for their next commission. After all, if they have been on this project a long time and already made a lot of money, then the last few commissions may not matter so much to them. Near the end they will already be looking for their next project, and yours is slipping down the priority list. Persistently keep them on their A-game or hire in new — and more motivated — blood.
What is the effectiveness of incentives? Whatever buyer incentives(or motivational buy-now tactics) you used when sales first started slowing will quickly lose effectiveness. You could try upping incentives such as a cash bonus. But if you withdraw it later, after you have achieved a target, then you face a kind of perverse-reverse sales motivator with the agent thinking if they wait long enough you may increase sales incentives again. Persistasales means convincing agents that every incentive is just a one-time deal.
Are they experienced in this new market? Rather than the cause being a blasé attitude, sales or leasing agents may just not be as effective (or experienced) in the new market environment. For example, let’s say you are developing a housing subdivisionand your sales were all based on preselling. That involves selling buyers on the vision using plans and renderings and maybe a showroom. Preselling is all about selling buyers on the premise to ‘get in now’ to secure a pre-construction opportunity. It is a different skill than selling a home under construction or a completed home. When selling a completed home, the buyer sees warts and all, but also can appreciate the final product. An agent sells the buyer on the benefits of the finished product. Conjuring up a vision is not required. Some agents are better at preselling homes than selling existing and vice-versa. If your project has an agency who originally pre-sold, but because the market has slowed is now faced with completed homes to sell, then the differing expertise needed could handicap further sales. Persistence in this case might be futile. You may need to look at changing to agents who specialize in finished home sales. Similarly, you may have inherited a project that had completed homes and your sales team were employed to sell those down. They did a fantastic job, so you moved them into preselling the next stage. But for whatever reason (they blame the market) they are not closing deals. It may be time to get the ‘pre-sale’ specialists in!
The moral of this section: Persistence has a pay-off. Without persistence, development projects can flounder and every day equals extra dollars.
Andrew Crosby +64 21 982 444 andrew@xpectproperty.com
Property development is all about persistence. You will never make it to the finish line (at least on time and on budget) without unwavering persistence in almost everything you do. Persistence is about challenging the status quo and not accepting mediocrity. Persistence is about persevering to find a better, faster, cheaper or more valuable alternative to the solution that is first presented. It’s persistence with people that is most important. Persistence to a point of course! It’s a fine line between being just persistent enough to achieve what you need and being a pain in the butt that paradoxically slows things down.
This series ‘Persistence Pays’ is my who’s who list to be persistent with and when you might need to restrain yourself.
Build Contractors and Subcontractors
There are two times you need to persist with build contractors. One, before you have a signed construction contract and two, after you have signed the contract!
When you are scoping projects be gently persistent to extract build rates and pricing that you can use to revise your feasibility and budgets. It’s important to maintain good relationships with contractors for this purpose — once again it’s a two-way street. If you are asking a contractor to give you some pricing for say, the next stage of the failed project you have just taken over, then he’s only doing that where there is a potential job for him down the line. As a developer it’s easy to forget that it may take the contractor some time and effort even to provide indicative pricing, especially if there is substantial construction cost inflation in your market. Any contractor will give you at least one quote, but after that they will increasingly become weary if no job (for them) results. If they are already doing multiple jobs for you then they should oblige providing estimates or quotes. Otherwise though, don’t overstay your welcome. Sometimes when I get conscious of overusing my contacts, I say it’s for feasibility purposes and offer to pay them like a professional cost consulting service.
Once you are in a legal contract, then the contractor should perform as per the letter of the contract and no need for you to have to encourage or persist, correct? Well, oftentimes, no. Let’s call this ‘persistagality’ (persistence with legalities). This means generally persisting with the contractor to get variation price and information requests back to you as soon as possible (irrespective of what the contract says). Reciprocate by helping the contractor out by getting them information in a timely manner as well and they will probably be more forthcoming. When managing the construction contract you need to persist with laying down your expectations of how you will treat additional cost and time claims. The contract, when negotiated correctly, should stipulate the process and what is valid or not, but often there is still a level of interpretation required.
If your project — already resurrected — starts to have its own construction delays and budget overruns (argh, not again!), then persistagalities takes on a whole new meaning. Especially so where additional costs are not clearly covered by liquidated damages or are your responsibility. Now you are compelled to persist, outside the scope of your contract, to limit the damage. Take this example:
As the client you are responsible for supplying an electrical transformer for a new industrial building that you have pre-leased. The transformer delivery is late by a month. That impacts on the contractor’s ability to finish their works as they can’t do their final hook up and test the electrical circuits. The contractor could be entitled to make an extension of time claim for $1,500 per working day or $30,000. Worse, on the other side of the equation you have promised a commencement date to the incoming tenant that will now be delayed — a double whammy! That penalty is another $20,000 hit to your bottom line, not to mention an angry tenant. Persistence to minimize your loss is required. You need to find a creative solution and you may not be able to legally rely on the contractor to help. I found myself in such a situation. We rigged a temporary power supply up to another source. We agreed with the tenant that we would pay their power until the transformer was in place, including a day’s loss of trade to switch the power from temporary to permanent. After convincing the contractor, we modified the existing construction contract to enable works to be completed later when the transformer arrived. That allowed us to get the tenant in on time and removed the potential of costly extensions of time with the contractor. There was the tenant loss of trade cost, some double up of works and a reasonable variation from the contractor to come back on site once the transformer was in place. In the end, because of polite but persistent hustling to obtain agreement from both the tenant and contractor, the damage was much less than it could have been.
Many construction contracts include a defects liability or warranty period. This is when the builder is legally obliged to return to fix any issues or latent defects. This period can be a testing time for your persistagalatic attitude, especially if the builder has left the jobsite and is now immersed in other projects. As time goes on they can get progressively more difficult to contact and coordinate to fix issues. It might be next to impossible if there are no retentions or final payments withheld. Add to that, you can have buyers or tenants who will be on your back to get issues fixed. But now there may be others in the middle, like agents and property managers, making it all the harder to complete tasks. This final effort to complete everything requires developer persistence — don’t underestimate it.
The moral of this section: Persistence has a pay-off. Without persistence, development projects can flounder and every day equals extra dollars.
Andrew Crosby +64 21 982 444 andrew@xpectproperty.com
