General@ColizzaArchitects.com
October 20, 2004
Design
Economics—Consulting Architecture and the Due Diligence Process
The concept of due
diligence places a high degree of responsibility on the architect. The client
relies heavily on the architect to assess the viability of a property and/or
buildings requiring significant knowledge of the marketplace, economic,
technical and legal issues. A number of these considerations are identified in
the article ‘Due Diligence in Purchasing Real Estate’. The following article
highlights areas in which the architect must develop an in-depth understanding
and innate ability to respond to development sector interests.
Some of the key
factors which form a successful analysis of a piece of real estate are;
· Land use - what is an appropriate use in terms of
marketplace;
i.e.
does the land in question possess the attributes suitable for the intended
use
- condominium site versus rental
apartment site
- office site versus light
industrial site
- institutional site versus
residential site
- big box commercial site versus
regional mall site
The official plan
prescribes the regional land uses and objectives for growth and sustainability.
The zoning bylaws encourage development to follow the objectives of the
official plan and set specific criteria for development. These visions are
continually challenged and adjusted to suit changes in the marketplace driven
by lifestyle and workplace needs.
The architect must be
aware of the intent of the official plan and recognize the planning principles
in place which influence the potential land uses for the property in question.
Granted the architect must address the technical requirements of the zoning
bylaw but will increasingly explore solutions which oppose or require
amendments to the official plan and zoning bylaws.
A recent example of a
major adjustment to land uses in the official plan emerged as a result of a
correction in the high technology sector. Many municipalities amended their
official plans to capture the wave of business park growth only to find
themselves with an abundance of land which possesses uses which no longer
apply. An architect will now be responsible to envision new uses for these
lands which meet a new demand in the marketplace and satisfy the municipal
objectives for growth.
Another example
requiring knowledge of the marketplace is the recent demand for apartment
living with the urban area. This demand is driven by an influx of immigration
from countries which are accustomed to apartment living and a local seniors
market who desire to remain within their neighbourhood but with less maintenance
and a higher level of security. The architect may be faced with a property
which under the current bylaw permits low rise commercial on a main street. However, the land is poorly positioned within
the commercial street and may be better
suited as a high density residential use.
The reality is that
land becomes available at different times and must address the uses which are
currently in demand. Hence the term highest and best use comes into play. The
area may be in transition and the surrounding uses and zoning may no longer
apply. The architect must be aware of the neighbouring uses and amenities
within the catchment area i.e. shopping, transit, schools, views,
entertainment, restaurants and accessibility and the direction the
neighbourhood is headed. The highest and best use may not necessarily be
defined in the current zoning bylaw for the site in question; i.e. a fifteen
storey residential building may be the highest and best use although the bylaw
supports a five storey mixed use development (combination of commercial retail,
office and residential).
The architect must
possess the ability to ascertain the marketability of a property for a specific
use and to identify the characteristics of the desired product;
i.e. a residential
high rise apartment building of a specific density and height, mix of suite types, number of bedrooms,
features, views, amenities, variety (split bedrooms, eat in kitchens, emphasis
on formal dining versus loft style, ensuite laundry etc.). Knowledge of the
marketplace in any sector is critical.
- Cost –what is an appropriate cost
of the land versus the intended use
- condominium site versus rental
apartment site
- office site versus light
industrial site
- institutional site versus a low
rise residential site
- retail site versus an office site
The architect must
have a knowledge of local land costs and what is an appropriate land cost for
the use intended; i.e. the marketplace may suggest that the land is worth x but
the use intended cannot sustain a land cost of x; i.e. a neighbourhood retail
plaza cannot support retail land @ $400,000 an acre but a community shopping
centre can support retail land @ $400,000 an acre. There are a variety of
factors which drive the ability of the community shopping centre to support the
higher land costs including a diverse tenant mix which will absorb a rental
rate with a higher cost component for land. This retail site will have
attributes that justify the land cost; i.e. a mix of major retail anchors, accessibility
to major highways and regional roads, proximity to market, etc.
- Cost –what is an appropriate cost
of the building versus the intended use
- condominium building versus
rental apartment building
- office building versus light
industrial building
- institutional building versus laboratory
building
- retail building versus a bank
building
The architect must be
fluent with the construction costs of various building types as the client will
expect a design and building quality appropriate with the use intended and the
sale price or rental rate the market is willing to bear.
i.e.
a suburban rental apartment building is built within $95 - $100/s.f.
an
urban condominium is built within $125 - $150/s.f.
a
suburban high technology building is built within $120 - $150/s.f.
Why is this
important? The client will expect the
architect to have knowledge of the features and where the money is to be spent
in a building while maintaining a budget.
- Revenue – what is an appropriate
return versus the intended use
There
are many factors which drive an appropriate rate of return on an investment.
Perhaps the hardest lesson to be learned by architects is that buildings are
commodities. Most credible architects spend countless hours pouring over the
planning of a site and the design of all aspects of a building to develop a
successful and attractive solution. The marketplace will respond to a product
if the cost is relative to the perceived value and within their budget. The
architect must know what features and quality to provide and at what end cost
to the consumer and the client. These decisions affect the rate of return to
the client and will determine the financial success of the project. The
knowledge of what the market expects for a condominium apartment costing
$200,000 versus $350,000 is critical as is the knowledge of the net cost before
profit to the client. Before determining the actual character of the product, a
yield study must be prepared to assess the potential of the land given a
specific intended use.
For
example, an architect will embark on a yield study to assess the potential of
the land following the receipt of 1) a current survey indicating the boundary
of the property, grades, features, easements, rights of way, location of
neighbouring buildings etc. 2) a geotechnical analysis indicating soil composition,
load bearing characteristics, possible contamination etc. 3) a thorough review
of the bylaw requirements including a discussion with the area planner at the
municipality to assess the status of the bylaw and the history of neighbouring
properties including previous requests for relief 4) a discussion with the
local alderperson to assess needs within the community, other projects in
consideration, and to establish political support 5) municipal road widening
considerations, centreline road setbacks, noise concerns, transportation
concerns, servicing capacity, hydro considerations, etc. 6) an understanding
with the client of the land cost and the minimum number of units or square
footage necessary to justify the asking price for the land. Refer ‘Due
Diligence’ for other applicable considerations.
Setting
development objectives adds focus to the yield study and generates a planning
response in tune with the development clients expectations.
For
example, a development client identifies a piece of land which has become
available at $1,375,000 and wishes to develop a minimum of 85,000 s.f. of
residential condominium space. The architect quickly surmises that the land
cost per square foot of residential condominium space is $16.17. Thus, a 1,000 s.f.
suite would have a land cost of $16,700. If the architect has knowledge of the
market place it would be possible to immediately assess if this is realistic,
recognizing that typical residential condominiums have a land component between
$15,000 and $20,000 per unit.
The
architect places the setbacks within the property lines from the survey and
commences the planning of access and parking and initial suite layouts with an
elevator and stair core. The suite layouts must respond to a market study
indicating size, mix and features. This criteria is broad enough that a typical
floor can be established sufficient for a yield study. The scheme can be
finessed in design development and a core and parking strategy must be
developed in concert with the plan of the building. Once a floor plate is
established then the number of units per floor and the objective of 85,000 s.f.
can be assessed. Building sections will establish height which will be assessed
against the permitted height in the zoning by law. A vast variety of other
considerations must be assessed as well, including limiting distances to
property lines for unprotected openings which affect percentage of glass and
consequently the character and possibly the yield of the site.
This
applies to all sites and land uses whether institutional, commercial or
industrial (ICI).
In
the example, the yield study generated a number of options including a floor
plate with 8 suites per floor ranging between 900 s.f. and 1100 s.f. and 6 suites per floor ranging 1400 s.f. to
1100 s.f.
A
proforma which takes into consideration land costs, hard construction costs and
soft costs (development charges, building permits, geotechnical engineering,
legal, surveying, marketing, sales, consultants, etc) will be built based on
the building area including parking and amenity areas. The cost of parking is
always a factor as structured below or above grade parking can dictate the
number of units in a development as the cost per stall, at a some point,
becomes a show stopper. The proforma will assess all costs to the project
including interim financing and projected carrying costs to the sale or lease
of the last unit. A variety of land purchases are creative in that a vendor may
be willing to participate in the development or delay closing until all
approvals are received. The proforma is flexible in consideration of any
opportunity which will reduce net costs and improve profit. At the end of the
yield study and the preparation of a refined proforma, the sale price of the
unit will be established including the profit per unit. The architect must be
cognizant of the marketplace and whether the projected sale price is realistic.
The greater the experience of the architect in any sector the more valuable the
architect is to the development sector.
Once
the square footage or the number of units and mix and sale price is established
it is the architect’s responsibility to seek approvals from the municipality
should the scheme exceed the requirements of the zoning bylaw. This process can
be cumbersome and require skills to acquire consensus from affected parties as
in abutting land owners (vested interest), from politicians to establish
political will, and to prepare a planning argument to defend the scheme (change
in land use or density) at a local planning committee or Provincial Municipal
Board hearing. The architect’s skill sets must be broad as an insurmountable
number of issues must be addressed. The ability of the architect to receive
approvals is central to their recognition and success in the marketplace.
The
commercial sector has a range of rental rates for various building types which
are adjusted annually as inflation affects the market. These lease rates will
be used as a gauge to measure the viability of a project. Commercial proformas
address the specifics of each site and yield and are driven by achievable lease
rates.
The
institutional sector has similar industry rates but the nature of specific
building types have fewer comparables and require a broader analysis to assess
appropriate lease rates. The Institutional sector typically demands higher site
and building standards which require a greater deal of effort in the due
diligence stage to thoroughly define and address program requirements and building
technology expectations.
In
all cases, the architect must be aware of the relationship between site,
building costs and architecture.
Case Study –
Due Diligence Issues
- Land Ownership – Client reveals
that a mortgage exists on the land which
Is
overdue and requires investors to participate in development. The vendor
extends terms for one year. This is important to the architect in that land
speculation is popular and architectural services have a value. This value must
be protected.
Owner
forms investment group to finance yield study. The architect coordinates a
survey and assesses zoning bylaw requirements including permitted land uses.
The investment group wishes to develop a gas use with car wash. The zoning does
not permit an automotive use and the alderperson indicates that there is no
political will for a change in use. The neighbourhood will support strip retail
without fast food. Other conditions placed by the neighbourhood include a
restriction on a drive through window for a bank to be placed on the sides of
the building and not in the rear yard.
- Grading
The
architect receives the survey and grades and recognizes a significant incline across
the site requiring a transition in the building floor slab to accommodate an
entrance of
- Marketability The viability of the site is of
concern as retailers
require flexibility to expand
on one level. The leasing of
the site
is difficult as retailers request larger foot prints
than
the existing grade permits. The developer is reluctant to step floor plates but realizes there is no
other option.
The
architect plans a building with a partial second floor to take advantage of the existing grades
and to increase the yield. The second floor could be an office use or specialty
retail. The developer is skeptical of the viability of the second floor and
chooses not to develop the second floor stating the rate of return is too low
and that second floor vacancies persist in the marketplace. The architect
should have been aware of the marketplace conditions for second floor space.
- Transportation The retail scheme and site does not
receive support in
the
marketplace due to poor access and the lack of left in and left out. The options for users are limited to peak pm
traffic.
- Change Strategy The developer chooses to market the site
as an
automotive
site recognizing that the zoning change will
be appealed
to the Ontario Municipal Board. The
architect must decide if a gas
use is appropriate given
the failed attempts to develop the site as a
commercial
retail site
and the neighbourhood concerns with noise
and pollution. If the architect supports the automotive
use a
planning argument must be developed to defend
the amendment to the bylaw.
- Financing The vendor is
frustrated with the lack of payment on
Jeopardy
the VTB and acknowledges the site is
difficult. Political
will is not
forthcoming. Investors become anxious. Stay
tuned.
Case Study –
Residential Condominium Site
Due Diligence Issues
- Program The
developer sets the initial program at 85,000 s.f. of
net
residential space due to the land costs of
$1,375,000 or $16.17 per s.f. The objective of
the study is to determine the number of units given a range in size, building height
required to accommodate 85,000 s.f. and to establish the required parking to
suit the number of units. As well, the
study must assess the bylaw requirements for parking to determine if these are
realistic.
·
Current
Zoning -
The current zoning permits a five storey building with
setbacks which place limitations on the
size of the floor
plate
and building configuration. The Planning Department indicates there is support
for a zero setback in the front yard and rear yard. The official plan
prescribes main street development which encourages ground floor retail and second floor office,
with residential space above. The developer wishes to build a residential condominium
exclusively without a commercial base. The planning department insists on a
plinth level or projected base to address the commercial street, thereby
meeting the main street urban design guidelines. The architect must take this
into consideration when arranging the ground and second floor to create the
base and be cognizant of the area devoted to the plinth level.
·
Yield Study The initial yield study was conducted
utilizing a floor plate of 8 units per floor varying in suite size from 900 to
1100 s.f. The floor plate was 8400 s.f. net residential area. The number of
stories to achieve 85,000 s.f. was determined to be 11 floors. The number of
units was 11 x 8 = 88 units. The parking required under the bylaw was 1 per
unit plus visitor (88 – 12 = 76 x .17 =13 stalls) for a total of 91 stalls. The
site study yielded a limited number of stalls on grade (allowing for a
reasonable degree of landscaping and exterior amenity area) and the below grade
parking yielded insufficient parking to meet the bylaw on two levels. The architect requested the planning
department to reconsider the parking ratio or reduce the number of units.
·
Abutting Land
Ownership The survey indicated that a
municipal sewer easement abutted the rear property line. The architect
requested confirmation of the ownership and the developer indicated that the
land was owned by the City and the abutting neighbour held an easement for
parking purposes.
· Zero Rear Yard
Setback As previously mentioned the
Planning Department indicated that support for a zero rear yard setback was in
place and the building could effectively be placed tight to the rear property
line and adjacent to the sewer easement. The initial scheme followed this
premise and throughout a subsequent change in program (to 6 units per floor)
the zero rear yard setback formed a major component of the planning for the
tower and the garage. A change in program from 8 units per floor to 6 units per
floor was introduced during the due diligence period. The developer decided to
focus on higher end units, larger in size and with more features capturing
views north to the river and south to the community.
1.
Public Meeting A meeting arranged with the alderman for
the community was held. A presentation
was made of the proposed site plan, floor plans, elevations, height and shadow
studies. Feedback from the community
indicated a lack of support for the development.
· New information The
surveyor was requested by the architect to confirm the width of the easement to
assess the distance to the neighbouring building as the residents of the
neighbouring building requested confirmation of the separation between the buildings.
The surveyor confirmed that the land which was identified as a sewer easement
was actually owned by the abutting neighbour. This presented a number of
concerns. As a result of the due diligence and yield study the building was
planned with a zero rear yard setback recognizing that the City owned the sewer
easement and that relief for limiting distance for unprotected openings
(windows) would easily be agreed to with by City. Given that the current zoning permitted only
five stories in height and that the scheme required eleven stories at 8 units
per floor and 15 stories at 6 units per floor to achieve 84 units (ground floor
forming amenity and building managers suite) an amendment to the zoning would
be necessary. It is difficult to request a zoning change for height which could
be perceived as having a negative impact on a neighbour and then to request
relief for limiting distance from the same neighbour as well. This dependence
on the neighbour would jeopardize the approvals and likely provide the vehicle
for the neighbour to control the form of development. This is irrespective of
the virtues of the scheme which are plentiful and worthy. Nonetheless business
is business and one does not arm thy neighbour if possible. Hence, it was
agreed to adjust the scheme and reposition the building closer to the street
and away from the rear property line. The distance from the rear property line
to the building face satisfies the limiting distance calculation for the
unprotected openings. An elevational study was prepared to address this issue.
· Shadow Studies As
part of due diligence shadow studies were prepared
to assess
the impact of the building shadow on the neighbouring buildings. In this case,
this is particularly relevant in that the neighbouring building is a nursing
home and requires daylight in common areas etc. The shadow studies indicated
that the fifteen storey building did not negatively impact the neighbouring
building.
This
information has been circulated in support of the zoning bylaw amendment and
alleviates this issue.
The
architect must be aware of as many issues as possible to ensure the viability
of a development at many technical levels.
The zoning bylaw amendment is currently in progress at the
City.
Case Study –
institutional Life Lease Site
Due Diligence Issues
·
Program Life Lease Non Profit Development
The
program for the Cumberland Seniors Development involves an analysis of a 14
acre waterfront parcel of which 9 acres of land are flat. The embankment lands
are approximately 5 acres. The lands fall within the
·
Life
Lease A
recent concept in ownership where the resident must be of a specific age. It is
not a condominium and ownership is limited to the leasehold improvement not the
land. The finance industry is slowly accepting the concept although it is
convention to finance a residential unit with land ownership. The province
supports life lease and the legal right to discriminate against age. The market
value of a unit is the same as a condominium. Monthly fees are collected
similar to condominium fees. An elected
board represents the interests of the owners. The unit is sold on the open
market and upon closing a percentage of the sale price is due to the life lease
corporation. The unit is to be leased
for life however, it can be sold at any time. An occupant must be of the
specified age ie. 55 plus. The non profit aspect eliminates the mark up or
profit on the land and building typical of any other profit driven real estate
development. The architect was expected to investigate all issues relative to a
life lease and to establish the program and economic model. The client hired a
development manager to provide development expertise although the concept was
new to the development manager as well.
A
road trip to visit a number of existing life lease developments produced a
number of program and economic modeling data.
·
Yield
Study The
field trip presented a number of observations including the recognition that a
number of life leases were established around a low rise scheme of a limited
number of units (120 -140) requiring 4 acres of land. Given the suburban site and
board preference for a low rise ground oriented scheme this approach would form
the basis for a yield study. The 9 acres presented a number of issues requiring
diligence including soils testing for bearing capacity, slope stabilization,
storm water management, site servicing and from a master planning perspective
programming and phasing. The master plan commenced with a concept for the life
lease comprised of 2 buildings of five stories linked with a courtyard over a
single level garage and a commons building. A road network was established and
preliminary serviceing design was undertaken to establish site development
costs. Concurrently, the scheme was presented to the planning department to
establish support and feedback. The master plan was developed to incorporate
phasing and built form (building height) to address municipal objectives.
Hence, phase two and three are comprised of high buildings. The official plan
amendment and zoning was adopted based on the master plan.
·
Master
plan The master plan formed a central part
of the due diligence as the site must address future development and the
analysis of phase one must address the carrying costs of the lands for future
development. The lands required for phase one were approximately 4 acres which
required consideration in the proforma for the remaining 5 acres. The burden of
carrying the cost of the 5 acres on the initial phase of development under a
non-profit scenario was deemed to effect the end sale price and the viability
of the project.
·
Development
Costs Typically the cost of preparing
the due diligence are
funded by the developer who seeks the invest
opportunity and has the resources to cover the expenses. A non profit life
lease corporation does not have the resources unless there are funded through
the a service club ie Oddfellows. The costs of the official plan amendment and
zoning process including the due diligence is significant. The Cumberland
Seniors raised private funds to cover the expenses. The development team and
the architect deferred costs throughout the due diiigence period.
· M O E The waterfront site required a review by
the MOE to
assess the
impact of the development on the river.
A
report analyzing the environmental aspects of the development was prepared by
an environmental engineering consultant and submitted for review.
· Marketing
The project has received municipal approvals and
suite
layouts and building design was advanced to
marketing. The non profit group took the project to the marketing
stage but the vendor insisted on a closing and took back a mortgage with a one
year interest free period. Funds were raised to pay the down payment. The
project has deposits on 53 out of 60 units on the first building as required
for CMHC mortgage insurance. The project needs a cash infusion to continue
through the marketing phase.
A white knight may be required.
https://www.dramatispersonae.org/DesignEconomics/VinceColizza.htm
http://www.dramatispersonae.org/EnterpriseOfTheCity/HomePage/DueDiligence.htm
http://www.DramatisPersonae.org/DesignEconomicsFrontPage.htm