Success at housing
development depends on the participation of a number of different
* developer (owner)
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
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.
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.
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.
When the nonprofit developer determines that it
lacks the experience to be a formal partner, it may wish to
"facilitate" a development venture.
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,
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.
WHAT THE ARCHITECT DOES
plan and product design.
includes an "elevation" which is a drawing of what the building will
look like; a typical unit layout; and, site plan.
Development - - - an elaboration of the schematic including an outline
of the specifications
Drawings - - - or construction documents that contain every detail of
development (i.e. the detailed specifications).
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.
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
he done other deals? If so, what kind of deals?
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?
this is quoted as a percentage of development cost.
Single family sales projects, however, architects sometimes charge on a
per unit basis.
architects charge a flat fee.
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
WHAT TO WATCH OUT FOR:
have to watch the architect carefully so that he doesn't blow the
the architect what you can afford for construction before he begins his
WHAT TO LOOK FOR IN A
- 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"?:
contractor has to pay for materials at the beginning of construction.
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:
(in coordination with the architect).
you can avoid it, don't bid the contract out because you want the
architect and the contractor to be a team.
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.
the architect sub-contracts for this service (but the developer would
want to be there when the estimate is made).
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".
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.
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.
construction manager does the same thing as the general contractor,
i.e. organize the sub-contracts.
difference between the two is as follows:
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
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.
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.
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.
construction draw schedule is developed at the closing of the
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.
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)
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.
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.
should, however, be aware that all policy decisions are his or her
responsibility, not the consultant's.