Risk mitigation is one of the first points that any developer should address when defining a vision. When facing the potential downfalls of a project, our natural instinct of loss aversion shuts the project down. It is for this reason that risk mitigation is crucial, and without it every project would hold grave risks.
High-risk investments are not for everyone, and unnecessary high risks are exactly this: unnecessary. In the spirit of assessing risks, here are the core transgressions in any risk mitigation strategy that are sure to harm your target bottom line.
This is the first installment in our continuing blog series on risk mitigation. The following posts will cover many of the questions and concerns regarding development projects. If you’re just joining us now, you may find the rest of this series of use as well:
Follow the shortcuts:
Part 1 – Developing in the North Gulf Coast Region: Reaching Your Target Bottom Line
Part 2 – A Guide to a Realistic Commercial Development Budget
Part 3 – Ways to Keep a Development Schedule on Track
Part 4 – 4 Common Development Risks on the North Gulf Coast
Part 5 – Mitigating Commercial Development Risks on the North Gulf Coast
Part 6 – The 4 Critical Milestones for a Successful Development Project
Part 7 – How Design Impacts a Development Project’s ROI
Not clearly defining your development vision
…or in other words, not having a clear idea of what you want. Adaptability in no way is a bad quality, but not having a position from which to pivot from leaves you in the dark. How is this solved? A clear mission statement, which stems from understanding what it is that you want in the first place. At the bottom-most level: are you searching for an income property that will support you for years to come, or a net return that you could invest elsewhere? Have you explored the best options for achieving either, such as a mixed-use multi-family complex?
Building in the wrong location
Building in the wrong location is putting your eggs in the wrong basket. This often comes about from a misunderstanding of the target market, demographics, or a bias in vision. This, in turn, stems from misinformation. Either the time invested in research was insufficient, often due to external pressures, or an aspect of research was under-appreciated.
If your project does not match the land that you own, then tailor your project to its most optimized permutation. Whenever you are changing the design of a vision, be sure to consult with the design experts on your team. They are integral to the development process.
Not understanding the obstacles
As mentioned in the previous paragraph, misinformation is a cause for poor decision making. Misinformation means unassessed risks, which are the enemy. These unassessed risks include, but are not limited to:
- Unaccounted soft costs
- Not including contingencies within the budget
- Overlooking building restrictions before purchasing property
- Assuming permit acquisition timeframes
- Overlooking marketing the finished product
- Bringing in development support after crucial decisions have already been made
- Errors in timeline which result in a loan’s interest fees accumulating indefinitely
Losing control of the budget
Generally speaking, a target budget is a realistic ideal. If the project finishes under-budget, all the better. If it finishes a little over-budget, assess the reason behind the extra costs, and learn from it for the next time. However, when a project begins to spiral, and a complete shut-down is the only true solution – well, it goes without saying that this is a disaster to be avoided at all costs.
A good budget should only face this problem in exceptional circumstances. The best we can do is take everything possible into account. If this means spending resources in the early stages of a development project on a design expert only to find that your project won’t work after all, then you have in fact saved money that you can invest elsewhere. As a final point, it’s never a bad idea to have an exit strategy. Planning for the worst takes a little bit of time, but it well worth it.
Post-occupancy building failure or litigation
This is a massive fear for many developers, and for good reason. Not only will it harm your pocket book and reputation, potentially for good – it’s dangerous. People are at stake here. It is for this reason that cutting corners is an awful idea. If you don’t have the funds to develop your idea, get the funds or invest elsewhere.
Now that the mandatory warning is in place, what is our strategy for avoiding this issue? Design is the obvious finger to point to, as well as construction materials and oversights by management, but as long as you do your job right, then many of these are nullified. Assurance that all of the bases have been covered surrounding the physical aspect of building is the only guarantee that you can have, and this comes from fully understanding the location and structure itself. The obvious case is for engineers and architects, but do not forget soil experts, brokers, etc. Many architects offer these services, and they can aid in fully understanding the laws that would affect your project, and could offer alternatives to aspects of the structure that could infringe upon these laws.
Reaching your target bottom line is your ultimate goal, and we hope that this article has brought light to several common pitfalls in development projects.
