Development holding costs

Discussion in 'Development' started by MrsNixba, 30th Mar, 2016.

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  1. MrsNixba

    MrsNixba Well-Known Member

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    @Westminster - Thanks for the advice. I understand that not all costs can be known, but I also understand that all known costs can be broken down or itemised. EG the feasibility has "Professional fees - $69,285 (Inc. Architectural/construction drawing, Surveyor, Engineering, Hydraulic Engineering, Landscaping, Council Application fee)" - can't this be further broken down? Seems a little generic to me. Does this mean it only includes those fees or that those fees are just some of the included fees? And can't the 70k be split into those categories indicated? It's quite a specific number, so surely it's been added up from something more itemised that I can then access and verify? I'm of the same line of thinking as @Leo2413 above - am I asking too much or is this reasonable? Also, I'm a little concerned that I had to request the inclusion of some costs (first 12 months holding, BA and PM) so how do I know if other costs are omitted to ensure a decent profit margin?

    Also, nothing has ever been mentioned about a DD clause. We've signed contracts to date (unsuccessfully) and none have had this clause.

    @Skilled_Migrant - To have my questions answered. If he answers my questions and responds to my concerns with reason and consideration, then I have no issues with what is being presented to me.
     
  2. MrsNixba

    MrsNixba Well-Known Member

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    To clarify the above answer to @Skilled_Migrant's question - obviously sharing too much prior to purchasing would be stupid. The issue isn't with the properties being presented, the issue is with my access to information that affects whether I make a purchase.
     
  3. Sackie

    Sackie Well-Known Member

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    @MrsNixba read your break down above and for me, that would be OK.

    If they have at the very least:

    Hard costs: X amount
    Softs costs: roughly X amount (made of x,y,z consultants) but not necessarily categorised.
    Contingency: X amount
    End sale value: X amount

    For me that would be OK and I wouldn't need any more detail at that point of the early stage. I guess it all comes down to how much you trust the ability of the person doing all this too. Ideally, I would think you should be doing independent research like check on forums, google etc to see if what they are telling you is more or less accurate, imo.

    DD clauses in contracts are great because it gives you some breathing time to do your DD and stops the site for a period of time from being nabbed by someone else. In the past I have had mixed response by agents, some were fine with it and others were not happy to allow it where the interest was just too strong for the site so they declined. If the site is something your very familiar with and have run the numbers on other similar sites then maybe no further DD is needed but there is always the added risk when DD is hurried due to no 'extra' time from clause. It's just one of those things, weighing up the risks.
     
    Last edited: 31st Mar, 2016
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  4. Cactus

    Cactus Well-Known Member

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    Good point I am ass-u-me-ing that this was part of their engagement. I.e. that they are specifically being engaged to find development sites that are returning a forecast IRR of x%

    In order to prove the x% one would expect a level of detail in the feasibility and that all things are considered.

    I have bought and assisted in acquisitions on development sites from 30-2000 lots, and am required to provide full DD.
     
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  5. MrsNixba

    MrsNixba Well-Known Member

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    All things considered - such as their own fees? Now making me skeptical of other costs that may or may not be included, and which I have no capacity of knowing.

    I understand that in HIS mind, what he has provided is enough, and it probably is, and it may well be accurate. I haven't said that I don't trust in him or his ability. The initial question if we rewind back to the OP was asking what is the norm when it comes to DD and I now know that there are a million different ways of undertaking a feaso. So I guess now I have to modify the question - what can I reasonably expect in a feaso as a paying client? Am I expecting too much if I request a break down of costs?
     
  6. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    I think you could reasonably expect a breakdown or answer of how the sums were calculated or estimated.

    The answer may be any of the following or a combination:
    - the figure represents 7.5% of the estimated construction costs and we have found that to be a fair estimate at this basic feaso stage
    - the figures represent known charges based on a similar development in the area
    - the figures represent quotes from contractors

    Note the 7.5% used above is not a real amount but just an example. I know some PMs and architects work on percentages
     
  7. MTR

    MTR Well-Known Member

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    I know of a number of BA that provide no feasibility whatsoever for their clients who are sourcing development sites, other than rough projections.

    At the end of the day it all comes back to the contract. If you signed a contract and the BA has fulfilled their obligations then you are fighting an uphill battle.

    If the BA has been presenting development properties this requires time and effort, expertise which include an architect/draftee viewing the site to determine what can be achieved, zoning etc. Could even include expertise from an arborist, town planner etc. These people charge hourly rates.....Its not black and white

    I am being devils advocate here and pointing out that if someone was not happy with the services but has viewed several properties that met the client's criteria do you really believe that the BA should return funds because the client has changed their mind??. I expect these people are operating a business not a charity.

    Once again, it all comes back to the Contract, don't sign anything if you are not happy with the conditions.

    I recently crossed out several conditions in my contract with my architect, he agreed to waive these conditions and all happy. Bit late now after signing off.

    MTR
     
    Last edited: 31st Mar, 2016
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  8. keithj

    keithj Well-Known Member

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    Any competent developer must have a detailed breakdown of all these costs - either known or estimated. If your mentor or BA is unable to provide them, then find a competent one instead.

    Any experienced developer should easily be able to provide both budgeted & actuals from previous similar projects, and some actual fixed quotes for your project. By providing generic sub totals it doesn't tell you what is or isn't included. As they have supplied such an exact figure it implies that they DO have the figures that makes up the sub totals - why are they unable to let you have it ?



    As any experienced developer knows, developing isn't all sunshine & lollipops, and any thread that portrays that is living in la-la land and worse doing a grave disservice to the budding developers here. So I look forward to your developing thread :) - warts and all :eek:.

    And is your BA aware of this thread ? Have they participated ?
     
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  9. thydzik

    thydzik Well-Known Member

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    I add the complete list of costs, including holding, and always assume it will be lender financed even if not.
    It allows you to produce a conservative margin.

    Edit: actually, I don't include holding costs prior to starting the development process. only the holding costs during the construction and a reasonable time-frame for getting approvals, etc.

    If I was to hold land for a significant period of time, and then decide to develop, I would not count the past holding costs, and use a current land valuation for the calcs.
     
    Last edited: 31st Mar, 2016
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  10. MrsNixba

    MrsNixba Well-Known Member

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    I would assume so considering that he had knowledge of the thread that incited the discussion to begin with.

    Not under the username that I know him as, so to the best of my knowledge, I do not believe that he has participated.
     
  11. MrsNixba

    MrsNixba Well-Known Member

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    No idea - all I get when I ask for more information is a talk about how the reports I DO get take 6-8 hours to compile and that they are personally verified by him. Considering that they often have the wrong date, misspellings, incorrect property addresses, mistakes of all sorts, I'm not sure what kind of attention to detail has been applied, nor what kind of attention to detail will be applied throughout the PM process. If there is 6-8 hours worth of information in there, why don't they actually include it in the report? It would make them appear much more favourably to me as a client!
     
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  12. MrsNixba

    MrsNixba Well-Known Member

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    Thanks MTR, all excellent advice. I understand professionals charge hourly rates and if the BA is applying a DD process this comprehensive, then that's excellent. Wouldn't these people be providing reports or findings, considering an hourly rate has been paid? If I'm paying an hourly rate, I'd be wanting a written report of their findings and recommendations. Or is it more informal than that? Are you paying for them to visit a site then follow up with them via a phonecall? What's the typical process here?

    Not expecting anybody to run a charity; what would lead you to believe that? I never said anything about expecting the BA to refund anything? My premise from beginning to end of this thread has been about asking am I out of line pushing for more information from him. I've never deviated from that line of discussion. And certainly never said anything about seeking a refund.
     
  13. thydzik

    thydzik Well-Known Member

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    first estimate the total returns over 4 years for the 18 month project, i.e. will there be another 18 month project after the first.

    then calculate the average yearly returns for each and compare.
     
  14. MTR

    MTR Well-Known Member

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    Not necessarily ?? back the contract?? I go back to Did BA meet their obligations?? that is the question??
    You have answered this yet.

    Did they provide you with suitable properties?

    Did they provide you with a feasibility, was this in the contract?

    There are various software packages on feaso, but some people use alternatives etc.

    As you can see... how long is a piece of string.

    Also with BA I also verify the evidence/what the BA provided ? phone re agents for end values, area, location, building costs etc etc.
    If you did then was the information provided correct??

    If you are looking for a refund, yet the BA met all their obligations then do you think you should receive a refund?

    There are always two sides to the coin, I know your story but I also know the other story, that's why I ask these questions.

    I think in the first instance if it were me I would not be posting this on a forum, I would have been discussing this with the BA concerned. This only complicates issues and you may not end up with the best result.

    MTR:)
     
    Last edited: 31st Mar, 2016
  15. Skilled_Migrant

    Skilled_Migrant Well-Known Member

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    • There is nothing typical wrt to BA (as compared to say conveyencing). It comes down to the agreement and the communication.
    • If the agreement states that DD on 5 properties will be submitted as a part of BA's services, that is what it is. If the agreement states that the BA will find you a block in suuburb X which can be subdivided that's all the BA is required to do.
    • No one can answer this question till the agreement details are known. The BA might be shortchanging you or you might be expecting more from him.
     
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  16. MTR

    MTR Well-Known Member

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    Correct. That was exactly my point.

    Just a side issue -
    I know a large BA company in Perth that actually advised/recommended a particular site for apartment development and building this in stages because their client could not source finance to complete the deal.

    The client purchased this property with the assumption that they would build it in stages. When the client went to source the finance MB advised that it was impossible to finance the deal in stages. This was total devastation.

    So very important to do your own homework with everything.

    MTR:)
     
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  17. MrsNixba

    MrsNixba Well-Known Member

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    I'm not attacking the BA for breach of contract? I'm just asking what information I should expect in a feasibility. I never said they didn't present properties with attached feasibility reports. I said the feasibility reports lacked detail such that I have been uncomfortable in choosing a property and as a result we have both become frustrated with each other.

    None of these concerns should be news to the BA. These are ongoing questions and have been for months. All these concerns have been voiced directly to the BA but I still felt uncomfortable, hence the originating question - if others are on the same page as the BA, I am happy to back down and accept his methods of feasibility.
     
  18. MrsNixba

    MrsNixba Well-Known Member

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    The contract was not that detailed. It was limited only by time, not property types or suburbs or quantity etc. Furthermore, there were no guidelines or limitations on what constitutes adequate DD and feasibility reports for the BA to have met his legal obligations. The contract contained no definitions of such. Therefore, the contract is open to interpretation and it is difficult to say without engaging a senior consultant / property lawyer to determine whether the BA did or did not meet his obligations (to answer @MTR's question).

    Comes back to my comment about perspective, which I also addressed earlier - to him, it's adequate, to me it lacks detail. Nobody is right, nobody is wrong.
     
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  19. thydzik

    thydzik Well-Known Member

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    How did you chose the BA? did they provide a sample or some indication as to their deliverables?
     
  20. abbyfresh

    abbyfresh Well-Known Member

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    Your gut feeling towards this BA doesn't sit right for you - this is clear. The questions you are asking should have been dealt with prior to signing their engagement contract.

    Might be good time to cut your losses and learn from the experience.

    Are we talking about a BA or Development Project Manager that happens to source the land as well as part of their service? Big difference?

    It can be hard enough to make a profit for many when it is just you, the builder and and the necessary consultants.

    Adding a BA / multi levels of project managers into the mix as well needs to really be worth its weight and costs in gold or you are just adding more phat and complexity into your profit margins and middle man, hence all the red flags in your head.

    There should be no major hidden costs or surprises, and this should be all clear from the beginning.
     
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