Unveiling the $4,000,000 Mistake

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In the dynamic landscape of purpose-built rental development, the journey from conception to completion is fraught with challenges. The process includes several tasks including: site selection, land acquisition, due diligence, land financing, proforma preparation, planning, approvals, consultant selection, construction manager selection, project manager selection, owner’s rep selection, design, permits, contracts administration, construction financing, construction and closeout.

Even the most seasoned investors can stumble, as evidenced by a revealing case of a series of events that led to $4,000,000.00 worth of unexpected costs incurred by an investor/developer that retained The GeoFocus Group to analyze their project during the course of construction, identify the issues that led to the projects current state and prepare a recovery and completion plan. In this blog post, we unravel the layers of the costly errors, emphasizing the critical role of due diligence at every stage of the development lifecycle.

The Domino Effect

Site Selection and Land Acquisition

The story begins with a lack of meticulous scrutiny during the site selection and land acquisition phase. Site selection is the cornerstone of any successful purpose-built rental project, yet it’s a phase often underestimated until the consequences are irreversible. The intricacies of site selection from the construction perspective including access/egress (traffic control), site logistics (laydown/staging), shoring/geostructural requirements may not be immediately apparent, but they wield immense influence over a project’s trajectory.

Picture this: the investor/developer enamored by a picturesque location that was likely to yield above average returns with a purpose-built rental development concept neglected to analyze several items during the land acquisition phase including: geotechnical issues (soil conditions), geostructural requirements (shoring), site access/egress (traffic control and proximity to existing hydro lines), site logistics (tower crane requirements) and laydown areas (staging). The lack of consideration to the aforementioned items would ultimately be the first tranche of items which significantly contributed to the developments ultimate demise during the course of construction.

Budgets and Preliminary Construction Cost Estimates

Relying solely on cost-per-square-foot budgets or neglecting to incorporate essential items missed during due diligence when constructing a purpose-built rental apartment is akin to constructing a house of cards in a gusty wind. Developers who adhere strictly to these simplistic budgeting approaches often find themselves grappling with unforeseen consequences as the project unfolds. Cost-per-square-foot budgets, while providing a basic framework, can easily overlook crucial nuances specific to the project, leading to gross underestimations and financial setbacks. Ignoring items missed during due diligence, such as site-specific challenges or regulatory requirements, creates a blind spot that can rapidly escalate into budget overruns and construction delays. From unforeseen environmental considerations to underestimated construction complexities, the consequences of these budgeting oversights can compromise the project’s financial health and even its timely completion. Therefore, a comprehensive budget that accounts for the unique demands of the site and regulatory landscape is imperative to navigate the complexities of purpose-built rental development successfully.

Planning Approvals

The strategic assembly of an adept architectural, engineering, and construction management team during the planning and approvals phase is akin to laying the foundation for a successful purpose-built rental project. Unfortunately, the case of a misguided developer serves as a stark reminder of the repercussions when this crucial step is overlooked. In this instance, building a multi-family development the developer lacked the foresight to assess the strength and expertise of his chosen team. By hiring an architect that specialized in wood frame construction to coordinate the design of a multi-story concrete structure, as well as retaining a construction manager versed in industrial projects instead of one with expertise in multi-family developments, the developer unwittingly set the stage for future complications.

In this instance the investor/developer’s focus was on intensification and maximizing the density that the site could yield. While successful in obtaining the density required to make the project “pencil out” on paper – the developer and the team that it assembled did not consider the constructibility of the design. While the planning approvals maximized the “highest and best use of the site” it did not consider the efficiencies and/or additional costs that would be required to ensure a feasible/viable and successful project.

While the planning and approvals process may not have suffered significant delays, the ramifications unfolded downstream, impacting budgeting, costing, scheduling, and even the design and execution phases. This misalignment in expertise exemplifies the critical need for a harmonized team that understands the unique challenges of the project, ensuring not just a smoother planning process, but also seamless execution from conception to completion.

Design

The consequences of navigating the design process with an inexperienced architectural, engineering, and construction management team can be likened to embarking on a complex journey without a reliable map. In the instance of the developer under scrutiny, the lack of understanding regarding the critical need for a team with a broad scope of expertise unfolded in a series of cascading issues. The design drawings, a fundamental blueprint for construction, lacked coordination, leading to confusion and rework during the execution phase. Specifications, essential for detailing the materials and methods, were absent or inadequate, causing a ripple effect of complications during procurement and construction. Consultants, unaware of their contract administration requirements, struggled to provide the necessary guidance, further exacerbating coordination challenges. Budgets, initially framed with oversight due to the absence of key considerations during site selection, land acquisition, planning, and approvals, began to unravel as unforeseen expenses emerged.

The design demanded a tower crane, it demanded shoring, it demanded excess cut/fill requirements, it demanded extraordinary traffic control requirements, it demanded the construction of a structural system that did not yield the most efficient construction means/methods.  The lack of consideration to the aforementioned items would ultimately be the second tranche of items which significantly contributed to the developments ultimate demise during the course of construction. This scenario highlights the pivotal role a well-rounded and experienced team plays in not just conceptualizing a project but ensuring that every detail is considered, mitigating risks and avoiding the domino effect of oversights as the project progresses.

Tender

The repercussions of an inexperienced developer and construction manager navigating the tendering process for a multi-family purpose-built rental development with an unseasoned architectural, engineering, and construction management team were profound and far-reaching. Despite the owner’s belief that their retained Quantity Surveyor and Owner’s Representatives were safeguarding their interests, a misplaced reliance on the inexperienced construction manager proved costly. The lack of detailed specifications and identification of crucial project elements became apparent during the award process. The ramifications extended beyond the construction phase, leading to discrepancies between the approved budget and the actual requirements of the project. The magnitude and complexity of the project, coupled with the oversight during the design process, meant that the approved budget fell significantly short of what was realistically necessary. This misalignment between expectations and the actual demands of the project highlighted the critical need for a knowledgeable and experienced team at every stage, emphasizing that the success of a purpose-built rental development hinges on a well-informed and coordinated approach from conception through construction.

Construction

The dire consequences of entrusting a purpose-built rental apartment project to an inexperienced developer paired with an inept construction manager unfolded like a cautionary tale of missteps and oversights. Fraught with issues from the earliest phases of site selection, planning, approval, and design, critical elements continued to be neglected throughout the construction phase, setting the stage for a cascade of issues that reverberated through the project’s lifecycle. What seemed like minor omissions in the outset, such as overlooking site logistics, inadequate planning for contingencies during approvals, lack of project specifications, uncoordinated drawings, incompatible contracts and design flaws stemming from a lack of expertise, gradually exposed themselves as insurmountable hurdles. As the construction progressed, the consequences of these oversights became increasingly evident, adversely impacting both the budget and schedule. When called upon, The GeoFocus Group arrived on site with the project (originally scheduled to be 22 months in duration) was two years behind schedule and a staggering four million dollars over budget. The developer could not overcome the planning, approvals, design and/or construction issues that were ultimately uncovered and the untenable situation forced the developer into receivership and the eventual loss of a $15,000,000.00 asset. This unfortunate tale underscores the profound importance of a knowledgeable and seasoned team, especially in the early phases, to foresee potential challenges and ensure a smoother trajectory from conception to completion.

The Team Factor: Navigating the Maze

Architects and Engineers

Embarking on the design process with an experienced architectural and engineering team is akin to setting sail with a seasoned captain and a meticulously charted course. For developers, the benefits of such a journey are transformative. A well-versed team, steeped in diverse expertise, ensures that the design drawings are not just blueprints but finely-tuned orchestrations, where every element harmoniously aligns. Their coordination is meticulous, preventing confusion and rework during the execution phase. Detailed and comprehensive specifications, borne out of the team’s experience, become the guiding beacons for procurement and construction, minimizing complications. Consultants, well-versed in their contract administration requirements, provide seamless guidance, smoothing the coordination process. Budgets, shaped by the keen insights of an experienced team, factor in considerations from site selection to approvals, leaving little room for unforeseen expenses. This scenario underscores the indispensable role of a seasoned team—where each member brings a wealth of experience— in creating a blueprint that not only conceptualizes a project but ensures every detail is not just considered but optimized. The result is a journey through the design process marked by efficiency, precision, and a steadfast avoidance of the pitfalls that can plague projects led by inexperienced teams.

Project and Construction Managers

Embarking on the design process with an experienced construction management and project management team is akin to navigating uncharted waters with a seasoned navigator and a meticulously planned route. For developers, the advantages of such a partnership are transformative. A proficient team, well-versed in the complexities of construction management, ensures that the design drawings are not merely conceptual but practical roadmaps, aligning seamlessly with construction requirements. Their coordination is meticulous, averting confusion and rework during execution, and ensuring that timelines are adhered to. Detailed and comprehensive project management, born out of the team’s experience, becomes the guiding framework for procurement and construction, minimizing complications and ensuring adherence to project goals. Construction managers, attuned to the intricacies of their roles, provide invaluable guidance, smoothing the coordination process. Budgets, shaped by the keen insights of an experienced team, encompass considerations from site selection to approvals, leaving little room for unforeseen expenses. This scenario underscores the indispensable role of a seasoned team—where each member brings a wealth of experience—in steering a project through the design process with efficiency, precision, and a steadfast avoidance of the pitfalls that can accompany projects led by inexperienced teams.

Lessons Learned: A Blueprint for Success

  1. Thorough Due Diligence:
    • Scrutinize potential sites with a focus on impacts to design and construction.
  2. Team Expertise Matters:
    • Assemble a team well-versed in purpose-built rental development and/or the type of construction that you expect to deliver. Prioritize experience over cost.
  3. Continuous Monitoring:
    • Regularly assess project progress against benchmarks.
    • Be proactive in identifying and addressing potential issues before they escalate.

The tale of the $4,000,000 mistake serves as a cautionary narrative for purpose-built rental developers. Due diligence and risk analysis is required at ALL PHASES of the development lifecycle and are of the utmost importance during site selection, land acquisition, due diligence, land financing, proforma preparation, planning, approvals, consultant selection, construction manager selection, project manager selection, owner’s rep selection, design, permits, contracts administration, construction financing, construction and closeout. Learn from the missteps of others, and let this story guide you toward profitable and seamless purpose-built rental projects.

While this example and cautionary tale was costly it is not amongst the most costly that we have encountered in our capacity of Construction Managers taking over projects that have been dysfunctional, distressed, delayed and/or disturbed.

 

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