Cursed By Knowing The Numbers

Tucked inside the 301 page CPUC Energy Policy Report [4MB]--their first policy guideline post-AB32--is this zinger:

The California Public Utilities Commission, through its “Big Bold Energy Efficiency Strategies,” has adopted three programs designed to move all new residential and commercial construction to a zero net energy standard. The goal of this program is to reach zero net energy in residential construction by 2020 and in commercial construction by 2030.

Another interesting point was the mandatory solar--so that it could be included in the T24 calc.

Mandatory solar isn't the way to go.  Shading, tilt and azimuth is a major issue in greater than 50% of residential sites, so we would end up with systems that don't pay for themselves quickly enough.  The report did admit that feed-in tariffs--the way they do it in Germany and Spain--are the way to go.  And this would promote higher performance design.

Price grid power high enough vs self generation--we think the curves have already crossed in PG&E territory and on the Big Island of Hawaii--add a feed in tariff, and the market will take care of the rest.  Or do what Marin did, and cap residential energy use at the equivalent of a 3,500SF home, and the owner or builder needs to compensate for any additional usage through greater efficiency, or the use of pv to self generate the difference.

Posted by Ted at 8:47 AM | Permalink

 are a bass-ackwards way of controlling time to complete on construction projects.  Was reminded of this pet peeve this morning when a past client emailed with news that only one bid was received on a project in San Francisco--his take was that it was due to an onerous liquidated damages ["LD"] provision in the bid documents.

I will be the first to admit that clients like LD's as a stick to get performance.  The problem is that this tool comes into play too late, and delays are often well documented from the contractor's side.  The truth of the matter is that LD provisions are largely ineffective, and if you are planning on using one, you need to double the amount of legal work you have budgeted for your project.

The solution?  Know the direction your team is moving in.  Manage your milestones. Do you know what your next three milestones are?  Know the numbers behind your schedules.  And work through changes very carefully.

Most contractors I have had the pleasure of working with think LD's are capriciously assessed, and more a way to run up attorney's fees than get quality construction.  I tend to leave LD provisions out of my contracts, but get very well written schedule reporting and recovery language into all my contracts--tied with progress payments.  Catch the team vectoring off course early, and correct the course at that time.  Recovery is the name of the game--get a good schedule and stay on top of it.

An ounce of prevention is worth way more than an onerous LD provision. 

Posted by Ted at 6:26 AM | Permalink

One of the big events at ULI last week--standing room only--was the issuance of the 2007 Emerging Trends in Real Estate Report.  Based on surveys taken over the previous summer, the report is usually about six months behind for the markets I work in, but a good way to understand how people are handicapping the prospects of the global property markets.

Some of the more pertinent takeaways:

• Bicoastal preference--New York, SoCal, Washington DC, Seattle and San Francisco are the top five investment markets.  The Midwest sags.
• Multifamily preference--rising mortgage rates, expensive housing, and demographic shifts slot this property type back into the pole position.
• Niche Fever--will subside as the stock market and private equity funds provide alternatives for capital that last year looked at condo-hotels, assisted living, and resorts.

Emerging Trends Best Bets for 2007?

• Develop Infill and Mixed Use--in 24 Hour, Coastal, High Tech Centers.  Job growth is back in the Silicon Valley and Seattle.
• Focus on Management--no more cap rate compression to bail us out of overpaying for assets.  Protect future cash flows by working down expense levels.  Use green technology to reduce expense.
• Buy Homebuilder stocks.
• Build Green--reduce costs, and insulate yourself from utility company rate shocks.
• Sell the Dogs--Sellers have the upper hand, but the window is closing.
• Cap rates are anybody's guess...was shooting the breeze with someone from a major apartment investment firm and he was making the case that real estate should be a 4 cap business--25x net income--in the coastal, high barrier to entry markets.

Posted by Ted at 9:08 PM | Permalink

In part II, you learned that you need to read and understand the adopted codes relevant to your property and then look contextually at improvements around you, to discern if there is a discretionary element modifying the adopted codes.  This provides you a baseline on what can be done.

The next step is to understand who the stakeholders are.  These are typically abutting neighbors, long-standing community groups, anyone who holds an easement or deed restriction on your property, and the authorities having jurisdiction (AHJ) over any entitlements.

Real estate is reputed to be all about Location, Location, Location.  During the approvals process it is more like Neighbors, Neighbors, Neighbors (NNN).  And their first reaction to any change is likely to be No, No, No.  And you need to get to yes, yes, yes.

Your key task is to go and talk with your neighbors, propose the changes to the neighborhood, why they should support you, and why you are doing it now. 

The objective  is to get a letter of support from each of your abutting neighbors for your intended use. 

You will need conceptual level plans, elevations, and what the improvements will look like from their vantage point.  You are not selling a project, you are proposing this in the neighborhood and you want to understand their concerns.

Rinse and repeat with any community groups, other non-abutting but influential neighbors, non-governmental committees (historical, etc), and easement holders.  The objective here is to respond to concerns on your intended use before it shows up in the public arena. 

Caution:  too much community wrangling can make the intended use look like it was designed by a committee (which it was) rather than the voice of your architect. The goal is incorporation by your architect of contextually derived  ideas,  not design by committee.

Only after you gain neighborhood support for your intended use do you move forward.  Moving forward without this support is pissing into the wind.  Not to mention expensive.

Posted by Ted at 2:06 PM | Permalink

  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:

1. You understand the risks--quantitatively and qualititatively.  You price it.  You put a probability on it happening to you.
2. You recruit talent that can help you to reduce these risks.
3. You maintain a dialogue with everyone involved in eliminating or mitigating this risk.  Focus, focus, focus. Faster/better/smarter.  Price it again.
4. 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.

Posted by Ted at 7:27 AM | Permalink

...is my definition of the perfect jobsite.  This is the responsibility of the superintendent, and it is the best way to build and maintain momentum to an on-time, on-budget completion.  It sends a message to all that enter the grounds that this team is professional and will deliver dramatically distinctive results.

The costs to keep a site lean, mean, and spotlessly clean are a fraction of the costs to recover from damaged materials, lost time accidents, or the message that professionalism does not count.

How clean is your job?

Posted by Ted at 8:12 AM | Permalink

...and why are we owners so in love with it?

At least until construction pricing started rising here 2% per month...

The short definition of fast track is that you start digging the hole, installing your utility connections, and building a foundation prior to completing design of  the superstructure.

The benefit is that you get to overlap your final design time with the first phase of the construction period. This takes a couple of months out of the design/construction schedule.  It allows you to dial in your exact finishes when you get a chance to walk the building, and get a "full scale model" perspective of the light, air and spatial relationships.

It seems like we only perform fast track delivery anymore, much to the consternation of our talented (and opinionated) architects. Given the fact that this is what the market demands, what and how can you fast-track?

We will not commence a project until we have all permits and firm fixed price contracts for the following:

• We complete design on everything related to the exterior envelope, structure, waterproofing and rough openings for doors and windows.
• We complete design on HVAC system supply and return duct sizing and locate units.  We locate kitchen exhaust fans and ducts.
• We locate dryer exhaust ducts and waste plumbing returns.
• We complete all MEP work for each floor, detailing connection sizing and location of verticals.

Basically--we do all work under one building permit.  This takes a great deal of the approvals risk out of the budget, and allows us one or two passes of building it on paper to get our numbers close to right.

We price off a version 1.00 of the finish schedule.  Many of these items can be placeholders--the trick is the thickness of the assembly needed for stone or paneling--including any mortar beds.  What we want to fix are wall, ceiling and subfloor dimensioning and relationships--top of subfloor, and back of mortar beds in bathrooms.  Casework and cabinetry are placeholders, with unit costs budgeted in according to the level of finish indicated in the finish schedule.  Landscape and pool are placeholders.

In short, we have a complete budget tied to a placeholder finish schedule, that we can iterate off of as construction gets underway.  This eliminates a good portion of construction risk, and yields a cost to complete and time to complete estimate that is a reliable budget and planning tool.

Posted by Ted at 8:12 AM | Permalink

..are a part of any construction and development project. Whether the changes come from an element we did not foresee, or something that we changed our mind about, the development process seems very similar to the way a friend used to describe how she skied the moguls--"It is a series of linked recoveries"

This chart breaks out the cause of changes as a portion of total cost overages.

1.  Design errors and omissions are the elements a prudent designer would have included in a set of contract documents.  Examples are modifications to one location that do not ripple through to details, or changes in architectural drawings that were not picked up in structurals or MEP's.

2.  Trade Contractor Coordination is the cost of performing work that falls in the gap between trade contractor contracts.  Kitchens are prime examples of where these gaps could occur.  Cabinet maker's boxes do not align correctly with architectural woodwork, or HVAC, or appliance connections.  Coordinating plumbing--ie roof drains--with interior framing is another example.  Architectural drawings show intent, Structural drawings show member sizes, and it is left to the general contractor to get it all to fit.

3.  Unforeseen conditions</strong> are those uncharted items that are discovered only upon opening up the work area. Examples include dry rot discovered after demolition of a building interior, a geothermal hot spring discovered where a winery's underground chai, or barrel storage, facility is to be built, or soils conditions materially different from the soils investigation provided.

4.  Excessive change order pricing occurs when changes or additional work is ordered outside of the natural progression of the work, many times restricting the optimum pace and intensity of work being put into place.  Excessive pricing also occurs when a vendor is trying to make up lost margin over incomplete pricing.  Going to a sole vendor gives more pricing power to that vendor.

5. Code compliance is the cost of implementing corrections or changes to the work after an inspection by the authorities having jurisdiction over the work.  Obtaining final signoff on permits is often at the discretion of the authorities, and sometimes gaining this signoff requires additional work not in the contract.

6.  Owner scope changes are qualitative changes to finishes, or components.  Additional cost also comes from additions to the scope of work through added systems, or changes in the critical path necessary to incorporate these new requirements.  Qualitative changes ripple through a finish schedule, driving other changes to maintain a contextual relationship.  For example, basements are often an afterthought in the design process, but the intensity of building systems on this level and the fact it is the first part of the building constructed can trigger a lot of scope change early in the project.

The challenge is maintaining the pace and intensity of the work while folding in these changes.  We've met this challenge by:

• "building" the project on paper first through good scheduling and understanding the finish schedule
• making the general contractor responsible for any trade contractor changes.  If it is shown in the documents, the Owner is entitled to it.  Performance specification acceptance on waterproofing and acoustical aspects of the building.
• establishing a joint contingency account for design errors/omissions, unforeseens, and code compliance.  Motivation to resolve these changes faster/better/smarter is achieved through splitting  funds left in this account at the end of the project--money goes straight to the builder's bottom line
• establishing unit costs for installation at the time of writing the initial contract provides protection against excessive change order pricing, or at least a basis to understand where the pricing difference lies.

Owner scope changes are managed through our instant feasibility testing to provide a quick cost/benefit check before the builder spends any time pricing or implementing a change.  Limiting cost plus reimbursement on qualitative changes to tasks only on the critical path.  Owner supplies materials to keep on-time.  Coordinating building systems in the basement level by constructing this level on paper first with all players working together.

Changes make projects more expensive and run more lethargically than most realize.  Keeping our projects on-time and on-budget requires a roll-up-your-sleeves cooperative attitude to understand the real impact of any changes and the real benefit

There is realistically only so much recovery that can happen on a project before burnout occurs.  Keeping focus on achieving quality at the intended pace and intensity eliminates a great deal of contemplated changes before they start to slow things up.  Build it twice--the first time on paper. 

 Remember, oftentimes your first solution is much closer to the end result than you think.

Posted by Ted at 4:49 PM | Permalink

succinctly--simply but no simpler--is the first test of converting the dream to reality.  You have your site--now what?

What are the steps you need to take as an Owner?

Architects and designers have a design voice, an intrinsic momentum of how they resolve spatial issues, frame views, and balance form and function.  Your potential investment also has a voice--as yet unrevealed.  The first step you need to take is to find the architect with the voice that matches the voice of your dream.

Architects are trained and work their entire careers developing this voice. The architect's voice can document, communicate and resolve your dream in a way that the builder, the community, and the other professionals on the team understand in a way that risks can be quantified and the work priced, or "bought out" in the parlance of our industry.

The steps are:

1. Collect photos, examples, movies, of what this voice is to you.  I once had a client that told me he wanted the home in the movie "Legends of the Fall". Hard to get a clearer voice than that.  Another told me he wanted to bring David Adler and Tommy Church back to life and commission them.  A voice from the past...
2. Walk projects with architects.  Have them show you the opportunities and constraints.  Understand the resolution.  Understand the voice behind the resolution.  Rinse and Repeat until you find a voice that provides you with the next level of insight.
3. Have your architect develop the opportunities and constraints map on your site.  Make sure they understand permitting and approvals constraints--this can be an expensive omission.
4. Have your architect iterate on your program.  Do they get it?
5. Don't rush into a schematic design yet.  This is typically the first deliverable--but you can spend a lot of money generating design after design.  If you understand what can be done with the site, your first iteration on schematics will be very close to the final answer.
6. Start with a floor/site plan complete with inside/outside relationships, and exterior elevation of the primary facade. Overlay opps/constraints map on this.  Look at kitchen/living and master suite spaces--with furniture layout-- to understand flow/privacy/symmetry/arrival sequence.   This exercise will probably run $20K +/- $15K.

First cut at a budget: 100% of interior square footage + 150% of hi volume interior footage + 50% of terrace footage+100% of pool/spa footage + 5% of landscaped area footage multiplied by the current average cost per square foot for your area.  Add 30% of this total for soft costs, permitting and contingency.  Voila, you have to go make some more money.

Check against approvals constraints.  Sign off on the numbers. 

It will all be ok--there's nothing like a home designed around a dream.

Posted by Ted at 8:20 AM | Permalink