Tips For Small Business Owners & Owner-Occupied Property Development
Real estate development is just that... real estate development. Whether you're building an industrial building to enhance your business's operations, or trying to create a live/work mixed-use project by re-developing an old neighborhood, the process remains largely the same.
In this video, we break down a couple of tips that small business owners should contemplate if they're considering developing a property for their business operations.
Guide to the video
- Directing the efforts of a civil engineer is hard. But without a clearly articulated project vision, they'll often take the path of least resistance
- Small business owners need to consider project constraints brought on by the municipality and land, but also their needs as an owner-occupant
- A process-oriented approach to real estate due diligence is a critical risk mitigation measure business owners can take during land entitlement
Video transcript follows
Owner-occupants need to approach real estate development very differently than typical investors. Not because they aren’t concerned with a project making financial sense or being profitable. And not because they aren’t concerned with the functionality of the space or its resale value.
But because as an operating company and a small business, real estate adds an additional layer of complexity to decision making. It’s both a business capital budgeting decision, and often a wealth-building and income decision for an owner.
Add on top of that the complexity of the development process itself too. Often, it makes sense for business to pursue ground-up development instead of acquisition for various reasons – considerations like replacement cost, site optionality, timing flexibility, and facility optimization. But just because ground-up development might be the right strategic real estate decision doesn’t mean that business owners have the means or expertise to successfully execute on a project.
All too often business owners that try to self-manage their development run into major roadblocks. Problems like overpaying for consultants and service providers, or timing issues, or even suffering from dips in top line revenue since owners are managing a development project while also trying to run their business.
I am here to help you avoid some of those issues - don’t fall victim to the same challenges that other businesses have dealt with before you. So, keep watching for all that and more.
What’s up everyone – it’s Matt Marsh with Marsh & Partners.
Marsh & Partners is a development and national consulting firm that helps business owners and investors maximize their real estate and transform their businesses.
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Tips to give your civil engineer during land planning and site plan development
Civil engineers are a critical member when assembling your real estate development team. And a quality site plan will make or break an owner-occupied project. The problem is that many businesses who try to manage their own development, and even seasoned developers, give their civil engineer too much latitude.
Engineers are trained to work very narrowly within the confines of the constraints brought on by the land and by the municipality. And while those real-world constraints certainly need to be considered, I often call that approach the path of least resistance. And it can result in a site plan that doesn’t meet your intent or vision as a business owner.
To help better guide your civil engineer during site plan and construction drawings (CD) development, here are a couple of things to think about:
Historically, most municipalities have had minimum parking requirements – although some are doing away with them to foster more affordable housing development.
Even so, most minimum parking standards aren’t adequate to support a business’s needs. And without explicit guidance, a civil engineer will often defer to the development ordinance when designing the site’s parking yield.
This is a critical component of land planning that most owners don’t even consider. A municipality will require minimum turning radii for emergency vehicles and fire trucks, but that’s the extent. As a business owner, you might want to consider questions like:
- How is parking situated in terms of building entrances, tenant spaces, and interior operational functions?
- If you have loading docks, do longer vehicles have enough space to maneuver? And does that interfere with pedestrian or vehicular traffic on the property?
- Do delivery vehicles have their own dedicated loading/unloading zone?
Some businesses rely on the ability to serve customers as quickly as possible while others never have public visitors. Every unique set of operations requires thought into a site’s circulation.
The path of least resistance that civil engineers can find themselves taking is almost never the most cost-effective. They’re absolutely the technical experts when it comes to site plan and CD development but are often not good budgeters or cost estimators.
One-off developers and business owners aren’t equipped to help value engineer the site design to save on horizontal development costs either. Consider bringing in a contractor to offer real-time pricing feedback on design decisions. They’ll often have creative ideas for identifying areas where the site design can get more efficient without sacrificing functionality.
Marrying interior layout with the site program
The pre-development phase of a project is an iterative process. Plans compound on one another and as more details are codified, they begin to mesh with each other.
One of the many challenges a real estate developer has to deal with is making sure that architectural drawings and site plans aren’t developed in vacuum. In practice, a civil engineer will need a building footprint in order to finalize the site plan and construction drawings. And before you have a solidified footprint, an architect must codify the interior plans, at least on a schematic design level.
As you’re designing the site plan, your civil engineer should keep the interior layout in mind, so the functionality of the site meshes with the interior floor plan and operations.
Construction cost management
Hopefully, as a business owner, you’re well-versed in managing costs as it relates to your business. But construction cost management as part of the real estate development process is a completely different beast.
The biggest piece of advice I offer to help with managing costs is to start by managing project design as early as possible. Creating a development budget happens progressively as plans are further refined, but critical design decisions need to be priced in real time to avoid overly designing a project.
Construction soft costs drive hard costs – in other words, design translates to real labor and material costs. Every decision on fixtures, plumbing needs, electrical requirements, additional paving, site yield, etc. translates to real-world dollars. So, the time to start worrying about costs isn’t after you’ve already broken ground, but during the architectural drawings design process and land entitlement.
Managing project risk
Successful real estate development is all about managing risk and owner-occupied property development is no different. It’s a slightly different set of risk parameters, but the friction that’s inherent in the land development process remains.
You absolutely need to take a process-oriented approach to the front-end real estate due diligence. Dig into every aspect of the property imaginable – utilities, soils, streams & wetlands, easements, potential off-site improvements, land use & zoning, and environmental concerns, to name a few. Those due diligence investigations must be sequenced properly to avoid risking capital unnecessarily during pre-development.
Managing land entitlement risk is not something that can learned through self-study. It’s a skillset that is developed over time through years of dealing with planning departments, city and town councils, and various other governmental agencies.
I often suggest that business owners outsource some of that risk by bringing on a real estate development consultant to assist with the process.
And in terms of managing project risk from an operations standpoint, owners should be diligent about understanding not only their current requirements, but potential future space requirements as well.
Optionality is critical to operating companies. So, it’s worth considering future on-site expansion opportunities, sizing stormwater and utility needs for potential future expansions during a phase 1 buildout, and even building more space than needed today and leasing a portion of the project out to off-set debt service.
The economies of scale that can be achieved by front-loading certain elements of a phased buildout are often extraordinary and a great way to alleviate some land development risk.
So, what’s the key takeaway here?
Business owners shouldn’t make owner-occupied property development decisions by default. But all too often, they bite off more than they can chew and saddle themselves and their businesses with unnecessary risk.
If you’re in the middle of a development project, are thinking about pursuing one, or aren’t quite sure where to start, we might be able to help.
Book some time on my calendar, or you can reach out to me directly and, let’s start brainstorming.
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