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Developers must be willing to take big risks

For the past few years, I have been writing about urban living in Calgary: how it is evolving, how it compares to other cities and what the issues are.

It is now time to focus on the inner-city condo developers who are instrumental in shaping Calgary's city centre.

In my role at Riddell Kurczaba Architecture, and as a member of the Calgary Planning Commission, I have developed a greater appreciation and respect for the developer over the past year.

As for the commonly-held myth that developers have it easy in that they just buy the land, build on it and make a fortune, it just isn't so.

Condo developers, in particular, take a huge risk, putting up tens of millions of dollars to purchase land and then millions more for architectural fees, engineering and survey fees, building and development permit fees, marketing and advertising fees.

This is all done with the hope the market will stay strong or, as in today's case, improve so they can not only recoup their costs but also make a profit.

You have to be willing and able to take big risks if you are going to be a condo developer, as you don't just build one house at a time, you build hundreds.

Think about it. If a new condo buyer is willing to put up five per cent of the cost of the condo as a deposit before it is built, the developer has to put up the other 95 per cent of the cost for a building that will not be completed for two or three years.

With today's rapidly increasing construction costs, and ever increasing time it takes to get approval and permits in place, the risk is very significant.

As well, building a condo is a very complex process, one that can fall off the rails at any time. In many ways, the developer must do a lot of "crystal ball gazing," trying to predict the future of the condo market.

What size of condos will people want in the future? Will people be willing to live in Victoria Park or along the CP Rail tracks?

If we build it, will they come? What finishings will be fashionable in two years? Should we go after the "empty-nester" or "young professionals" market or can we overlap the two?

Who else will be building in the area in the future? Can we come to market first?

Can we get increased density to keep the costs per unit down? Can we get timely support from the city and community association? What will be the construction costs next year and two years out?

Effectively managing a condo development from beginning to end is no small or easy feat. Five key steps are involved:

- Step 1 -- Buying the land.

Much time, effort and research is needed before land is purchased for a development. You have to evaluate many different properties, sometimes working with multiple owners.

You also have to look at current zoning for the land and determine if changes are needed and the probability that it can be changed to suit the needs of the market or the land.

Changes could mean increasing the density, which will then change the land value and the development's economic feasibility (i.e. can you construct a 20-storey condo building or a 30-storey one)?

Are there issues with the community association (i.e. are they pro development)?

Time is money, so can these issues be reasonably resolved?

What has been on the land in the past (i.e. are there any contamination issues)? Is a mixed-use development feasible -- condos, offices, retail or maybe a hotel? It is a bit like being a Vegas bookie: you have to determine what parcel of land will be a winner and which would be a loser.

Step 2 -- Designing the building and getting a development permit.

Assuming the zoning is appropriate for your development, you then have to negotiate with the city on what you can build on the land. You have to do the same with the community association and immediate neighbours.

If you want to increase density, what will it cost you? Do you add in some LEED (Leadership in Energy and Environmental Design) elements like a green roof, a plaza or pocket park, or contribute cash to the Beltline Improvement Fund?

All of this takes time and all the while the developer must keep in mind the goal of making some money doing this.

While the city has land-use guidelines for every block, every development site has its own unique characteristics and opportunities that must be evaluated and negotiated with city planners, the planning commission and finally city council.

Everything must be taken into account including shadows on public spaces, access to transit and LRT, density, set-backs, landscaping, number of parking stalls, access points, street trees and garbage areas.

This step can take 12 to 18 months or longer. I know of one project that has been at the city for over two years and it is still not approved.

All this time, the developer is paying interest on land cost, consultants and designers and is receiving no revenue.

The cost to submit a development permit -- including architectural, engineering, consultant and permit fees -- along with the cost to liaise with the city, community association and neighbours is easily in the $2 million range for a 200-unit condo development.

- Step 3 -- Getting a building permit.

With city approval, the next step is to get a building permit, which has more architectural fees attached to it and more liaison work with the city.

This process can take another three to six months to work out the details and cost hundreds of thousands more dollars.

- Step 4 -- Marketing the project.

At this point, a developer has to cost out the project to the finest detail, from the size of the counter tops and quality of the granite to the number of electrical outlets. Remember: a $1,000 error per unit, over 200 condos, can become a $200,000 mistake.

Once costs are established and the price to customers is determined, the developer has to market the property in a manner that is competitive with other condos, old and new.

Typically, the bank will want to see at least 50 per cent of the condos sold before it will release the money for construction to begin.

In today's market, construction costs are going up one to 1.5 per cent per month, which means that a one month delay for a 200-unit condo project, at an average size of 1,000 square feet per unit, that costs $250 per square foot to build, will set a developer back about $500,000.

The costs keep increasing, but the price of the condos has been set, so every month's delay means less profit and potential bankruptcy.

- Step 5 -- Negotiating construction contracts/supervising construction.

While the marketing is underway, the developer must negotiate a series of different contracts for the construction of the condo, from the concrete and foundation contracts, to those who supply the plumbing, electrical and mechanical, to those who will do the finishing work.

Once the contracts are signed and construction begins, there is two years of ongoing negotiations with trades and construction managers to keep the project on time and on budget. Anyone who has built a house or done any major home renovation can appreciate how challenging this is.

With about 50 cranes dotting the city centre skyline, and approximately 80 per cent of them building condos, I thought it would be interesting to learn more about the developers responsible for shaping Calgary's new skyline.

In upcoming articles, I will interview and discuss specific projects with some of the key individuals to give you a behind-the-scene look at how developers think, what their proudest achievements are, the challenges they face and what their thoughts are on the future condo market.

White is a Calgary-based writer who has written on art, architecture and urban culture for over 20 years. He is also an Associate at Riddell Kurczaba Architecture and can be reached at richardw@riddell.ca.

In Short:

Attributes of a developer:

- Visionary.

- Risk taker.

- Access to capital.

- Patience.

- Persistence.

- Good negotiator.

- Detail oriented.

Source: Calgary Herald (Saturday, February 09, 2008)
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