Neighborhood Transformation

Neighborhood Transformation

The "Development Team"
What Role Does Each Member Play?

Success at housing development depends on the participation of a number of different actors.

* developer (owner)
* architect
* attorney
* general contractor
* consultant


THE DEVELOPER

WHAT IS A "DEVELOPER": The developer is the project's sponsor. The developer starts with an idea, packages that idea, and then makes it into a product that is marketable to some target group".

A developer carves a nitch out of a market that is otherwise hard to crack. The developer seeks out gaps in the market and tries to provide an affordable housing product.

The job is much more difficult in low income neighborhoods. Bricks and mortar cost the same wherever you go. Somehow the developer has to hold down the costs of the housing or the financing in order to make its housing product affordable to these types of residents. Nonprofit developer, working in cooperation with government and intermediary organizations, are in a position to take on this challenge.

ROLE OF DEVELOPER (In General): The architect designs it, the builder builds it, the banker finances it, so what does a developer do? The developer's job is to coordinate and manage the production of the housing.

POSSIBLE ROLES FOR A NONPROFIT DEVELOPER

Sole Developer:

A nonprofit developer, if it has some experience, can take on a project as the sole developer (rather than associating with a private developer in a joint venture).

A nonprofit developer that wants to go it alone must make sure that it has some one on its staff with the expertise to plan, coordinate and manage the development process.

As an alternative, it may be possible, in some circumstances, for a nonprofit developer to retain the services of a capable consultant willing to provide them with extensive assistance on a project by project basis.

The noprofit developer also must have funds to pay for pre-development expenses and a net worth that will satisfy cautious lenders and investors who are concerned about the organization's capacity to complete the project.

If it lacks any one of those resources, it should consider joint venturing with a developer who is capable of filling the gaps in the nonprofit developer's resources.

Co-Developer (Joint Venture)

Where a nonprofit developer does not have the experience or capability to be a sole developer, it can enter into a joint venture with a private developer.

The nonprofit developer can use this experience to increase its capacity and experience so that it can produce and manage housing in the future without the need to enter joint ventures with private developers.
In other words, a joint venture can act as "on the job training" wherein the nonprofit developer can learn the fundamentals of housing development.

Facilitator

When the nonprofit developer determines that it lacks the experience to be a formal partner, it may wish to "facilitate" a development venture.

Facilitating is an informal role that includes monitoring and oversight. For example, the nonprofit developer's role could include attending meetings with architects, contractors, or subcontractors, in order to discuss the progress of the project, changes in design, delays, etc.

This role could also include meetings with the market analyst, lender, engineers, architects etc.

The goal is not only to have some control over project development but to acquire the knowledge and experience that would be needed to act as an independent developer on future projects.


THE ARCHITECT

WHAT THE ARCHITECT DOES FOR YOU:
  • Site plan and product design.
  • "Schematics": includes an "elevation" which is a drawing of what the building will look like; a typical unit layout; and, site plan.
  • Design Development - - - an elaboration of the schematic including an outline of the specifications
  • Working Drawings - - - or construction documents that contain every detail of development (i.e. the detailed specifications).
  • The architect may subcontract some of his work to an engineer. You want the architect to supervise the engineer. The engineer surveys the dimensions and topography, plats the sewers, tests the soil, etc.
    • Supervise the work of the general contractor by inspecting and "signing off" on the work completed prior to the contractor being allowed to draw down on the construction financing.
WHAT TO LOOK FOR IN AN ARCHITECT:
  • Has he done other deals? If so, what kind of deals?
    • Where his ideas compatible with yours? (take a picture to the architect and say "this is what I want to build, etc.)
WHAT WILL HE CHARGE?
  • Usually this is quoted as a percentage of development cost.
  • For Single family sales projects, however, architects sometimes charge on a per unit basis.
  • Sometimes architects charge a flat fee.
    • Most architects will want their money up front (meaning that the developer will have to add this to the amount of predevelopment "seed" money that will have to be raised). Some socially conscious (or hungry) architects, however, will "buy into your dream" and agree to get their fee from the construction loan (i.e. after they have done their design work).
WHAT TO WATCH OUT FOR:
  • You have to watch the architect carefully so that he doesn't blow the budget.
    • tell the architect what you can afford for construction before he begins his work.

THE CONTRACTOR

WHAT TO LOOK FOR IN A CONTRACTOR:
  • has the contractor built this kind of product before?
  • How many years has he/she been in the business?
  • What is the contractor's financial status?
WHAT IS A "DRAW DOWN"?:
  • The contractor has to pay for materials at the beginning of construction.
  • The money does not come from the lender until later in a "draw down" i.e. the bank pays for work in place ... until there is work in place, there is no draw down.
WHAT THE CONTRACTOR DOES:

COST ESTIMATES (in coordination with the architect).
    • If you can avoid it, don't bid the contract out because you want the architect and the contractor to be a team.
    • Cost Estimator: As an alternative, when a government agency requires that the contract has to be bid out, the developer can retain the services of a cost estimator who can do the same type of estimating that the contractor can do.
    • Usually the architect sub-contracts for this service (but the developer would want to be there when the estimate is made).
    • Usually the cost estimator is paid an hourly fee. The job should last a maximum of 10 hours.
    • Even if you have to bid the contract out, if the developer has a relationship with a contractor, he can go to the contractor and say "I have to bid this contract out, but why don't you go and give me an estimate, I will have to disclose your involvement but if that's ok with you its ok with me".
    • You can get a rough estimate of cost through valuation services but a cost estimator or contractor is more reliable. Two such services are Dodge Valuation Service and Marshall Valuation Service.
ACTUAL CONSTRUCTION
  • The general contractor subcontracts directly with all of the service trades that are needed to complete the project (e.g. masons, carpenters, electrical, plumbing, etc.)
  • As an alternative, the developer may choose to use a construction manager.
  • A construction manager does the same thing as the general contractor, i.e. organize the sub-contracts.
  • The difference between the two is as follows:
  • the general contractor contracts directly with the various construction trades and is therefor held responsible for cost overruns
  • When a construction manager is used, the various trade contracts are made directly with the developer (and not with the construction manager. As a result, the construction manager is not responsible for cost overruns.
BONDS:  In order to assure performance the developer usually requires the general contractor to provide a bond. There are two types: a performance bond and a payment bond.
  • A payment bond guarantees that all of the subcontractors and materials are paid for. The amount of the bond (e.g. 100%? 25%?) is negotiable. If all of the subcontractors are bonded the developer may not need a general contractor and he may be able to get by with a construction manager.  Having an unconditional payment  bond can  keep a project free of liens if the contractor fails to pay the subcontactors or material suppliers.
  • A performance bond requires a third party to come in and complete construction after a default by the general contractor.
  • Sometimes the contractor can not put up a bond. Instead, the developer may let the contractor put up 10%-15% of the construction costs plus a letter of credit from a bank, or, the developer my require a "retainage".
RETAINAGE: With a retainage, the developer holds back on the draw to cover risk of potential unexpected costs at the end.
  • For example, the developer (or lender) might hold back 10% on each draw up to the first 50% of the total draws, then 5% on each draw thereafter.
  • The construction draw schedule is developed at the closing of the construction loan.
  • When the first draw is made, the "interest clock" begins to tick. For this reason it is important for the contractor to complete the project on time because the developer has budgeted for only a certain amount of "soft costs" (when budgeting, it is best to add some months onto the contractor's estimated time for completion).
CHANGE ORDERS: If the contractor encounters something new that is not in the specifications, he submits a "change order" (either a "plus" change order or a "minus" change order). If the change is the architect's fault, he pays (the architect should have insurance for this).

As further protection against overruns, many general contractor agreements have liquidated damage clauses.


THE ATTORNEY

An attorney is required at the beginning of the project to set up the organizational structure. This would include such tasks as:
    • setting up the nonprofit developer (if this had not been done already),
    • creating a for-profit or LLC subsidiary (when necessary)
    • forming the joint venture (when relevant) either by crafting the partnership agreement or setting up the joint venture LLC (and crafting the "operating agreement)
    • creating a limited partnership (for tax credit deals)
Later, he or she will assist in the negotiation and preparation of all of the contracts and agreements that will be needed to cement the relationships of the various parties together (e.g. loan agreements, land conveyances, and contracts with architects, contractors, consultants, foundations, etc.)

Throughout the project the developer will require legal assistance:
    • in dealing with government agencies.
    • resolving disputes

THE CONSULTANT

His or her prime responsibilities are to see that all phases of the project are implemented in proper sequence and to keep the developer informed of options available at various stages.

The developer should, however, be aware that all policy decisions are his or her responsibility, not the consultant's.