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CRE Project Management; Avoid Costly Mistakes

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“There’s a lot more complexity to managing a commercial real estate project,” said Rob Olivet, senior director at MGAC. “Complexity of construction, of partners, of the amount of processes. There are a lot more complexities.”

Most project management has the same bones:

  • Planning
  • Organizing
  • Executing
  • Controlling Resources

The bottom line is achieving defined goals constrained by time and budget.

“They’re all different types of projects. There are different sizes and different scopes, and you’re dealing with a different level of general contractor, architect, and designers.” Adam Lutz is the industry lead for project and development services at JLL. “When you try to take that step…(and) navigating that process when you haven’t done it before, it is very daunting and you can make a lot of missteps which quite honestly can be pretty catastrophic.”

Experienced CRE developers and project managers advise that newcomers “do not try this at home” meaning it is not for the inexperienced.

“Project management is not something you can do yourself,” said Joe Meringolo, principal of JSM Project Management, LLC. “There’s a lot of experience that goes into (CRE) project management.”

He describes it as what is held in place between bookends.

What is PM in CRE? 

“It’s a process,” Meringolo continues. “It’s not something with an open end. Project management, to me, is the process and methods we use to get through that book-ended project. 

Having a defined process improves predictability, which improves all outcomes—schedule, budget and return on investment.

“It’s the golden triangle: Budget, quality and schedule,” said Joel Brenner, AIA and project director at Group PMX. “Budget, quality and schedule. For the first few projects, you need to bring in the project manager up front.”

The need for a project manager starts with the idea of a CRE project. Meringolo pointed out that there is a tendency for new developers to build their teams based on their own experience. The hardest step for many new or recent CRE developers is handing the keys to the project manager to be the owner’s representative.

“First, what do I want my core team to look like? All finance guys? A blend of finance guys and execution?” said Roger McCarren, president and CEO of Project Management Advisors. “They’re all slightly different. They should determine how well-rounded they want their core team to be.”

Some developers like to be involved in the process because of their personal expertise, while others are not interested in the details and outsource them all the time. McCarren said a good project manager works with both.

How are the project scope and vision established?

It’s all part of the overall process, 

“Developers should engage a project manager before they really even know what they want to develop,” said Lutz. “In many cases, developers find themselves in a situation where they might say, ‘I want to build a mixed-use project with multifamily housing, with a hotel, with retail,’ and they go down the road of doing that. They’ve just now spent some money doing that before going through a more detailed viability assessment or a highest and best use assessment to determine, ‘what can my parcel really accommodate.’” 

It all comes down to creating a process that balances the golden triangle of schedule, quality and budget.

Lutz and Merigolo both warn that if a project management team is not in place upfront, a lot of money and time could be spent programming and developing something that will ultimately not be built.

“The project itself is not only the market sector, size, scale and location, but the capabilities of the existing team or lack thereof,” Olivet said. “So that’s one of the things (a project manager) works on very early on.”

When it comes to CRE development, it’s a project. That means there are the known knowns—the components like budget, schedule and goal—but also the known unknowns—the aspects that you know you do not know, but are coming.

“A lot of the time,” said Olivet. “There are so many unknown unknowns, folks don’t know where to start and that’s very daunting.”

Unknown unknowns, he added, are the things that throw a project off schedule. Assembling an experienced CRE team under the project manager includes bringing on board designers, engineers, the attorney, and the general contractor. This experience helps reduce unknown unknowns by broadening the base of knowledge on the front end.

How are CRE costs budgeted and managed?

Brenner says this is why an experienced CRE project manager needs to come on board from the beginning. One of the unknowns is how much a developer is willing to risk and believes can be raised.

Brenner’s golden triangle is the first part of the budgeting process: how much, how fast, and how good.

“Every step of the way, we’re looking at the budget,” he said. “We’re looking at schedule and looking at ensuring that we’re meeting the requirements of the project objectives.” 

  • Quality and schedule will dictate labor and materials.
  • Land cost, entitlements, codes and regulatory requirements will dictate the ramp-up costs. 

“So where’s my goal to keep it online?” Brenner said. “It comes down to dealing with personnel issues and managing a large team every step of the way. We’re looking at budget, we’re looking at schedule and we’re looking at ensuring that we’re meeting the requirements. My goal is to keep it online.”

What are the key milestones in CRE development?

In CRE development, there are essentially six milestones:

  • Site acquisition
  • Feasibility
  • Design
  • Financing
  • Construction
  • Completion.

“(The developer) tells you, ‘Here’s the schedule,’” said McCarren. “‘Get it done.’”

It would seem that plotting these onto a calendar and knowing when site selection starts and delivery is needed is pretty simple. Those are Meringolo’s bookends. Filling the in-between is the challenge.

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What’s involved in site selection?

Site acquisition is more than picking out the location. It must include whether the proposed structure and uses are allowed by local zoning codes. The physical characteristics of the site can affect the vision and construction. 

Early consultation with local governments may suggest that the site is inappropriate for the project, that the project will generate public controversy or that the project would be desired if it were proposed at a different location.

“Different jurisdictions in different areas have entirely different requirements, even different kinds of builds,” McCarren said. “But we always find out ourselves right away. The first thing we’re doing is building cost, structures, and burn rates. Then we look at locations and start putting risk together, understanding the risk of the job.”

What is a feasibility analysis?

The adage, “location, location, location,” is no longer the final decision point. The analysis components are much more in-depth.

In general, Meringolo calls out that beyond the location, an analysis must look at competitive offerings, location, future development in the area, and the income a development will generate.

How are planning and design incorporated?

There are two steps before sticking a shovel in the ground. Entitlements and permits. The two are different. Entitlements are required to give a developer permission to proceed with a project. 

These may include “by right” entitlements permitted after a zoning site review or “conditional” entitlements requiring a public hearing and imposed planning and zoning board requirements called “conditions.”

Olivet said this is why experienced CRE team members are necessary. The right general contractor, architect, and engineer work together to bring the concept to a visual reality. The attorney and planner navigate the government processes. 

Without the approval of these two steps, the project will not proceed or it may encounter extraordinary delays in reaching the construction stage.

When is financing secured?

Many different types of financing fall into the debt or equity categories; the final financing is secured after obtaining entitlements so that regulatory-imposed modifications are built into the final contracted price.

When can construction start?

Construction is divided into three broad phases:

  • Site development
  • Structural construction
  • Interior finish. 

Lutz said that site development can often start ahead of structural permits. The grading, infrastructure installation, and utility lines are all being put in place while the structure undergoes building permit review. 

However, early site development cannot occur until the local government issues entitlements.

Why is legal compliance necessary?

Having a locally experienced real estate attorney on board from the very beginning of the project can smooth the rough edges and help overcome permitting hurdles. Keeping the attorney in place with the project management team reduces risk and misunderstandings.

The attorney will be involved with all contract reviews, ensure compliance with applicable laws and often act as the liaison between the government and the developer.

Why does CRE project management seem so complicated?

It’s a process designed to achieve a developer’s objectives. Unlike the relatively simple residential development process, which is practically an assembly line of homebuilding, commercial real estate involves many more moving parts.

Public health, safety and welfare are the legs of the regulatory stool. How those are enacted and enforced varies by jurisdiction. The scale of CRE development can trigger much closer scrutiny than residential development and generate public controversy for improper site selection. This adds cost and time to the inexpertly managed project. 

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Eric Jay Toll is an award-winning business journalist based in Phoenix, AZ with 12 years of experience in media and a specialty in economic development and commercial real estate. Eric came to development journalism from 30 years in the private... Read More »