On Risk, Part 1
Adding architecture, capital, knowledge, and labor to dirt successfully has four risks to it:
Approvals Risk--what you want or believe should be on a site is not what the authorities grant you the right to do.
Capitalization Risk--you have undercapitalized or over-leveraged your project financing, putting undue stress on the construction or operation of it.
Construction Risk--the quality, cost, and delivery time of improvements is outside the window of acceptability.
Leaseup & Operating Risk--you cannot produce the amount and quality of income you need to pay back investors, lenders, and yourself.
How do you deal with these risks?
Four ways:
- You understand the risks--quantitatively and qualititatively. You price it. You put a probability on it happening to you.
- You recruit talent that can help you to reduce these risks.
- You maintain a dialogue with everyone involved in eliminating or mitigating this risk. Focus, focus, focus. Faster/better/smarter. Price it again.
- You track mitigation/elimination until the exposure is behind you.
Approvals risk is the biggie in the markets I work in. Projects can take ten years to gain entitlements. There is limited ability to lay off risk on others. There are limited exit strategies. You are walking point through a very dangerous process--but one that is absolutely required to make the difference you want to make in our built environment.
I have always gotten my projects approved--part luck, part working with great people, part knowing what to take on (and what not). Part knowing the numbers. Paranoia helps, too.
And you really only have one shot at getting it right. Ed Logan, a planning professor of mine back at the 'Tute likened project approvals to his time as a WWII bombardier in a B-24 over Germany..."Your success is inversely proportional to your time over the target."
In the next few weeks, I am going to be looking at how my industry and I deal with each of these risks.
