Owner's Rep in Real Estate Development: Instrumental in Project Success

Steve Bentley is a high net-worth individual living in Los Angeles, CA. He identifies a parcel of vacant land near his home that he believes would be ideal to build a multi-family project on. Without really looking at any other properties or running any detailed financial projections on the development, he acquires the property.

Once the property acquisition is complete, Steve hires an Architect to design his vision. The Architect is quick to alert him that there is much more needed for a project of this magnitude. Not only will he need his Architectural Services to design this 42-unit condo project, but he will also need a Planning Consultant to get the project entitled through the governmental authorities; a Structural Engineer to design and engineer the structure; a Civil Engineer to design all of the site utilities and earthwork since his parking has to run subterranean; a Geotechnical Engineer to perform tests on the soil which the building foundation will sit; an MEP Engineer to design and engineer the mechanical, electrical, and plumbing systems; an Interior Designer to design the finishes of the residential units and common areas so they are saleable; a Landscape Architect to design the outdoor hardscape and landscape; an Acoustical Consultant to make sure the sound transmissions coming into the condominiums are code compliant; a Waterproofing/Roofing Consultant to make sure the building design does not allow any water infiltration that could potentially lead to future lawsuits; an Elevator Consultant to design the elevator system; a Building Insurance Inspection Consultant because the insurance provider requires them for condominium work; and since this project is in a neighborhood that is trying to lobby for lower density, he even needs a Political / Community Outreach Consultant to deal with opposition of the local Not in My Backyard  (“NIMBY”) contingent.

Steve knows that he is not certified to do any of this work on his own and does not want to get sued for a construction defect in 10 years. As such he decides to hire all of these entities but doesn’t know how he can possibly manage all of them. Steve has no experience in construction, let alone design and engineering. As such, he decides to try and manage all of them on his own. Several months into hiring all of the consultants, as well as a General Contractor, things start to fall apart.  Everything is a huge mess and Steve needs help fast.

Introducing the Owner’s Rep

Herein lies the need for the Owner’s Representative in the real estate/construction world.  The Owner’s Representative, also referred to as the Owner’s Rep, OR, or simply Project Manager, is sometimes an overlooked asset that can be included in any project undertaking. The Owner’s Rep bridges the gap between ownership and all other entities involved with the project. A true Owner’s Rep is well versed in development, design, and construction, so they know what it takes to pull off a successful development project and maximize their client’s Internal Rate of Return (“IRR”). In turn, the Owner’s Rep can use their ownership experiences to solve problems and offer creative solutions that directly affect the bottom line.

As one can see from the litany of tasks mentioned earlier in Steve’s case, there are a myriad of moving parts to a development project, many of which may be a daunting undertaking for most small property owners to handle on their own. If the Owner chooses, the Owner’s Rep can manage every aspect of the project, ranging from approvals to lease-up, something that individual Contractors or Consultants don’t have experience handling either. Hiring an Owner’s Rep is crucial and will allow the Owner to focus their time and resources on more important issues.

Acquisition

A very experienced Owner’s Rep can even be brought on before the acquisition of the property, to help the Owner with things like property selection, acquisition analysis, economic studies and due diligence. They may also provide financial support, assisting in the identification of various forms of traditional and non-traditional financing sources and then help evaluate and analyze each of the options. The compilation of feasibility reports may also be necessary for decision making and reporting to various partners such as equity, banks, and appraisers, which include market research, detailed financial analysis, entitlement summaries, and justification for “go/no go” decisions. The Owner’s Rep may also put together and update the project pro forma and even lead the project through the typically complex entitlement process, providing coordination with the city officials, land-use attorneys, and Architects involved.

Design

When it comes time to start the design process, the Owner’s Rep will assist in selecting the design team, typically at a minimum consisting of all of the players mentioned in Steve’s project above. They may create and issue a formal Request for Proposal (“RFP”) to go out to several different firms, or they may rely on past relationships to select a firm that best suits the particular project. Once the project team is formed, the Owner’s Rep can lead the effective collaboration towards a common goal. Again, the Owner’s Rep is typically involved in every aspect of the process and spearheads the flow of information among Architects, Designers, Engineers, Planners, Consultants, Contractors, Vendors, Property Managers, Sales Staff, Lenders, Governmental Authorities and of course, the client. Due to the number of players involved in the process, the Owner’s Rep should have a commanding influence to lead this synchronized effort to crystallize the design concept so that it can be built in the field.

This point in the project is the ideal time to start exploring/visiting the value engineering possibilities. Value engineering is a technique in which the value of a system’s outputs is optimized by crafting a mix of performance and costs. In most cases this practice identifies and removes unnecessary expenditures, thereby reducing the cost. The Owner’s Rep should work with the consultants to remove these unnecessary costs and put the money in places where it should be spent.

Procurement

The Owner’s Rep may prepare and maintain a Master Cost Report if the client so chooses, which includes the hard and other related development costs, such as acquisition, design & engineering, permits & fees, legal, FF&E & OS&E, administrative, sales, and marketing costs. This budget should include allowances for any anticipated cost exposures.

Prior to construction, the Owner’s Rep can interact with the proper authorities who have jurisdiction to secure the necessary project approvals and permits. Having the design team do this alone may prolong the process as they do not exhibit the same urgency due to their lack of ownership in the project. Many times an Owner’s Rep is needed to facilitate this coordination effort in a timely manner. They will also orchestrate all of the contractor bidding and trade buyouts. Whether the plan is to use a General Contractor, several prime Contractors, many direct Subcontractors, or any combination thereof, formal RFP’s should be issued and sent to at least three different contractors for each trade to ensure sufficient coverage through competitive bidding. All returned bids should then be thoroughly vetted and a comprehensive bid comparison presented to the client prior to awarding any contract. After this “apples-to-apples” bid comparison has been compiled for a particular trade, negotiations will commence to establish a complete scope of work that is cost effective.

Many times, in order to save costs, materials and equipment may be bought directly through a purchase order to the client. Similar to the trade work above, pricing should be obtained from at least three vendors to ensure sufficient coverage through competition.

Construction

The Owner’s Rep should prepare and maintain a Master Construction Schedule which incorporates all construction activities, procurement, material lead times, submittal lead times, approvals, permits, inspections, tenant relations, logistics, sales, marketing and turnover to the end-user. Weekly meetings should typically be held with the General Contractor and Subcontractors to review three-week or six-week look-ahead schedules.

The Owner’s Rep should also maintain a working history set of all project documents in the field, including drawings, specifications, requests for information (“RFI’s”), submittals, sketches (“SK’s”) and all relevant tracking logs.

In addition to document control, the Owner’s Rep should also provide quality control in the field.  In most cases a Superintendent should be part of the OR’s staff. This supervision is key to having a successful project that is built per plan and spec. It is also imperative to have a Superintendent to manage the field labor so that manpower stays at a consistent and productive level.

Accounting/Cost Control

As invoices, or monthly applications for payment, come in from the Contractors, the Owner’s Rep should review prior to recommending payment to client. During these billing periods, the OR should request and gather all conditional and unconditional waiver and release of lien forms from all Contractors, Subcontractors, and Sub-Subcontractors for progress payments and final payments. If payments are made correctly, this will protect the client from having mechanic’s liens recorded on their property.

Every month, as part of the Master Cost Report, a complete cash flow analysis and draw schedule should be updated and presented to the client, projecting costs on a month-to-month basis so that the client has a clear and realistic schedule of anticipated expenditures and bank draws. This service can range from general oversight and direction as to timing the cash with request, and move all the way to full control of the project’s cash management in a fiduciary position.

Project Close-Out

As construction nears completion, the Owner’s Rep should provide a punchlist of all completed work. A punchlist document will be generated listing those items of work which have been observed as incomplete or requiring correction prior to final payments being authorized. Also, near the end of the project, the OR will gather and compile books of all applicable product manufacturer and workmanship warranties, along with all applicable operations & maintenance (“O&M”) manuals for the end-user.

For a residential project, one must be cognizant of the Department of Real Estate (“DRE”) requirements. The Owner’s Rep should be involved with all DRE Filings, creating an itemized checklist of all relevant requirements and then tracking each of these items to ensure that nothing slips through the cracks as a project approaches its various tract map and condo permitting processes.

Sales/Marketing

Some Owner’s Representation firms may have the staff and experience to aid the client with sales, marketing, and/or lease-up, either directly or indirectly by providing oversight. Particular importance should be placed upon helping the client devise a sales and marketing campaign which helps the project differentiate itself from the competition.

Conclusion

The Owner’s Representative is a critical member to any successful real estate development project. As noted earlier in Steve Bentley’s case, poor decisions can easily be made by property owners simply because they do not fully understand the issues at hand and have experience with the processes. Sound advice to any person considering a development venture is to include an Owner’s Rep on the project team. More times than not, the client will discover that the time, money and hardship saved by having an Owner’s Representative involved will more than pay for the OR’s fee.