Developing a learning center from scratch presents a dream scenario, enabling one to incorporate all their past experiences into a shiny new flagship location. But as a real estate project, it presents a unique set of challenges. Regardless of whether you’re working with a seasoned group like STNL Development or you’re tackling your first project on your own, there are a number of best practices that’ll help any project run more smoothly. We’ve presented nine of them below.
First, a general observation: Chances are, your plate that is already beyond full. A multi-million-dollar real estate development, properly managed, isn’t going to add just a little bit to your workload – it’s going to require significant time and energy.
Assign a person to serve as a full-time Project Manager, and assume they’re going to be needed in that role for at least twelve months. This is a process with a lot of moving parts, and a lot of money at stake. Treating it as a part-time task is not going to lead to the outcome you would like.
This is the single most important decision you’ll make throughout the project. And unfortunately, you can’t move the site later if you “miss” on the location. So it’s critical to get it right, and not just for now, but also for many years down the road.
Analyze sites based on demographic conditions now, as well as five years into the future, stretching on acquisition costs to get the best site available.
Nowhere else in this discussion do we advocate stretching on costs. But this is an investment – one likely to pay for itself many times over.
The following example shows the huge lift that improving demographics can provide over time:
Assume two sites, A and B, with the following purchase prices and three-mile radius demographics:
Site A: $500,000. $70,000 average income with a 1.5% historic growth rate.
Site B: $750,000. $80,000 average income with a 3.0% historic growth.
Site B costs a whopping 50% more, and the demographics don’t seem that much better. Using an 11% occupancy costs factor (lease rate or debt service constant + property taxes + property insurance), that equates to additional annual costs of $27,500 ($250,000 *.11). Certainly a significant sum.
That sum, however, pales in comparison to the tuition increases rising incomes can bring. With the average incomes of the customer base for Site B growing to $90,014 in five years, compared to $74,295 for Site A, there’s additional income of $15,745. Based on childcare expenditures of 5% of gross income (which is on the low side), that frees up $787 in tuition for each student. For a school with an enrollment of 150, that amounts to $118,089 in additional income per year.
The added income covers the “stretch” of the site acquisition costs by an over four-to-one basis.
Bottom-line, acquire the site with the strongest growth potential, projecting where you see your business not just now, but five years down the road.
One other suggestion regarding site selection:
Work with an experienced commercial real estate broker. This is a common thread in this discussion – work with an expert. Again, this is the single most important decision you’ll make throughout the project. Align yourself with someone who can help you make the right one.
Working Through Entitlements
Development projects are sometimes viewed as three steps – 1) buy the site, 2) design the building, and 3) build the building. There’s a fourth step, and it’s where people often get tripped up: entitlement. Entitlement involves getting the legal approvals to develop a property for a specific use, and it can be a bumpy road, even for those that deal with it every day.
The entitlement process differs from city to city. It can take twists and turns based on site specific matters, such as being located in a flood plain. And it can be further complicated by murky, unseen forces, such as whether a town is pro or anti-development.
Due to the complexity of this subject, we’ll limit our discussion to brief overview, and offer one key suggestion below (hint: it again involves hiring experts in the topic.)
The entitlement process has two main components: 1) Is the general use allowed? And 2) Do the proposed physical improvements comply with all applicable regulations?
This considers whether the proposed development, legally, should be allowed on the site. Use restrictions can be put in place by a governmental agency, usually a city (for example, a zoning restriction). They can also be put in place by private entities, such as other developers. These generally come in the form of Restrictive Covenants, entered into the deed records and “running with the land”, meaning they remain in place unless and until amended by the original entering party. It is critical to determine early on how your project stands relative to its general use being permissible, as variances are usually difficult and expensive to obtain.
Approvals for Physical Improvements
This process takes on various forms, but in general, a new project needs approval for its specific proposed improvements in order to proceed. This is most commonly handled through a Site Plan review process, which focuses on such matters as traffic impact, storm water control, adequacy of utilities, etc. Generally, the governing body is trying to determine how the new project will impact existing surrounding uses, and whether it complies with development standards.
Bottom line, working through the complexities of the entitlement process requires the help of people who specialize in this area.
Engage a good land use attorney and civil engineer to help guide you through the entitlement process. And ask them to establish a timeline and projected budget early in the process so that your expectations are properly set.
Finding the Right Architect
Most people think of the architect as “designing the building”, and of course, they do that. But they should also serve as your ally throughout the project, fighting to make it a success. Great architects share two distinct characteristics: They are excellent listeners. And they have enough successful experience in a given field that they bring their own unique point of view.
The ability to listen to your vision is critical. If this feels “off”, particularly early in the process, abandon ship! Like any relationship on the rocks, it’s not going to get better on its own, and there’s no time for therapy. Move on and find someone you connect with.
However, you also don’t want a potted plant, someone blindly designing a project to your specifications without bringing a strong point of view to the process. You want an expert. A solid, healthy working relationship should involve you presenting your vision, and they should feel comfortable offering fresh alternatives based on their experiences and expertise.
Select an architect that carefully listens to you, but one that also has a well- formed point of view.
An additional point regarding the architect: Unless you have a highly experienced construction expert on your internal team, you’re going to need help in the area of construction oversight.
Engage the architect (or other third party) to provide “contract administration” services to ensure that the general contractor is delivering what the plans call for.
The General Contractor
Something to think about when you set out to select a general contractor: Once construction starts, you’re pretty much stuck with them. Not legally stuck, but in reality, it’s difficult and costly to change G.C.s mid-project. As in any industry, there are bad apples out there, and a bad one here can really sting you. So it’s critical that you fully vet your prospective G.C.’s background.
Work hard to properly vet your prospective general contractor.
Once a G.C. is selected, it’s important that you understand what their scope of work covers. Study and refine the design documents before any physical work begins, striving to limit any changes during construction.
Do whatever you can to avoid change orders. They can get very expensive in a hurry, so if the urge to make a change arises, consider whether it’s critical or desirable. If it’s critical, make the change. If it’s simply desirable, pass, and incorporate it into your next project.
As the construction phase winds down, keep in mind one last thing:
Manage the close-out phase as closely as you’ve managed other aspects of the project.
Make the punch list a priority. You’re paying good money to get the project you envision, and this is your final shot to make it happen. Also, before final payment to the G.C., insist that they provide a binder with all manufacturer and subcontractor warranties, a subcontractor contact list, and as-built drawings. Keep a copy at the property, and keep a second set elsewhere. It’s a small detail, but it will come in handy someday when the original project team is long gone.
Lastly, good luck! Developing a new facility is a major undertaking, requiring a lot of time and hard work. Hopefully you’ll also find it to be a highly rewarding experience.
About STNL Development: STNL is an industry leader in single tenant, customized real estate projects. We handle the entire development process, including site selection and design consultation, entitlement approval, and construction supervision. We also provide 100% project funding. To learn more about STNL Development, please contact Paul Morris here.
About the Author: Paul Morris received his B.S. in Construction Management from the University of Cincinnati and his M.B.A. from Cornell University. He has 27-years of principal level experience in real estate development, acquisitions, and operations. Paul focuses on childhood learning centers for STNL Development. He lives with his family in Loveland, Ohio.