Mr. Plotka

Human Resources, Recruitment & Training

Unlocking the Door to Success: The Keys to Assembling a Strong Development Team

By Robert Plotka, Managing Director, CityScape Capital Group

Work As A Team. Great projects are the result of great teamwork. Do not reinvent the wheel, and do not try to go it alone. A team of well-trained people, working to achieve a common set of objectives over time, is the most effective and efficient way of successfully implementing complex historic rehabilitation projects. Good teamwork requires that the qualities, styles and specialties of each team member are recognized in order to overcome shortfalls and draw on the group's collective strengths. Good teamwork also relies upon patience, perseverance, and a shared sense of mission.

Be Inclusive. One of the development team's greatest strengths is the diversity and inclusiveness of the team's membership. Early in the process, try to include key project staff and development partners in the design and planning stages to leverage expertise, minimize miscommunication, and build consensus. In some cases, a historic property may not be ripe for rehabilitation and it's better to find this out sooner rather than later. For example, a building may possess certain structural defects, or there may be environmental hazards lurking behind a wall or beneath the ground, that may preclude a project from moving forward.

Expect the Unexpected. The development process rarely runs smoothly. Unforeseen surprises can delay, or even terminate, the proposed rehabilitation of a historic building. That's why up-front due diligence is often a critical first step for any developer who wishes to renovate an old or historic property. Whether or not a historic rehabilitation project succeeds often depends upon the architects, engineers and consultants specializing in historic preservation who provide input to a developer during the feasibility stage. Their views can help determine whether to proceed with the actual renovation of a property. A successful redevelopment project starts and ends with the developer. Metaphorically, developers are the maestros who put all the players in tune. They are the ringmasters of a multi-ring circus. They coordinate and inspire, while at other times, they may rant and rave. Developers risk the cash on the front end of a deal. They also go hat in hand for money from partners and banks, and then become proud parents boasting that their new building can save the world. Developers are the major players in the high-risk, high-reward game of real estate development.

To finance the redevelopment project, a developer must win over the hearts and minds of prospective investors and lenders. The developer is typically judged on one's track record in the real estate development business, experience with the proposed project type, financial strength and liquidity, and willingness to choose other team members to balance out one's weaknesses.

As such, a key factor in the success of a historic rehabilitation project is the ability of the developer to assemble a strong team of professionals to carry out the project. The development team provides the developer with the essential skills, expertise and possibly relationships that may not be available through one's in-house staff. In addition, experienced professionals may add another level of credibility with the financing sources or other parties whose support is necessary for the success of the project.

Depending upon the complexity of the planned redevelopment and the level of in-house expertise, the developer determines what types of professionals are required to round out the development team and the order and timing in which these professionals are hired. As with any real estate development project, the core development team typically includes the developer plus an architect, legal counsel and a general contractor. Of course, other experts become involved at certain stages throughout the development process such as an appraiser, structural engineer, environmental consultant, market study firm, property manager and accountant.

For the developer who is undertaking a historic rehabilitation project, undoubtedly the critical decisions are the selection of an experienced architect, contractor and engineer specializing in historic preservation work. Furthermore, if the project is utilizing federal historic rehabilitation tax credits as a financing source, it is highly recommended that the developer engages highly experienced historic rehabilitation tax credit legal and accounting professionals as well as an experienced historic preservation consultant, who has a relationship with the local State Historic Preservation Office.

To facilitate the selection process of the development team, it is wise to seek referrals from business colleagues, lending institutions, trade associations and, even, the local State Historic Preservation Office. However, regardless of how these professionals are identified, the developer should thoroughly review their credentials, including resumes, references, licenses and evidence of insurance, as appropriate to their specialty.

Here are some helpful hints when selecting development team members for a historic rehabilitation tax credit project:

Traditional Team Members:

• Architect: Choosing the right architect is usually vital to a successful project, especially the adaptive reuse of an old or historic building. Architects can help define the project and provide meaningful design guidance. As a result, when selecting an architect, it is advisable to choose one who is well-versed in rehabilitation and, if appropriate, historic preservation.

• Construction Consultant: For a large-scale project or developer with little construction experience, a construction consultant can be hired to act as an intermediary between the developer and general contractor performing periodic inspections, reviewing change orders and pay requests, and verifying payments to subcontractors. At the very least, a construction consultant can independently review the general contractor's budget and timeline to ensure feasibility and compliance with financing provisions.

• Environmental Consultant: An environmental consultant first performs a Phase 1 Environmental Site Assessment which identifies the existence of any hazardous material or waste, such as asbestos and lead-based paint. If an environmental liability is found, an environmental consultant performs a Phase II Environmental Site Assessment which evaluates the nature and extent of the contamination. By identifying environmental problems upfront, the developer can accurately plan and budget for any necessary remediation work.

• General Contractor: Ideally, a developer should select a general contractor who has considerable experience with similar type rehabilitation projects. Experienced rehab contractors expect the unexpected by budgeting an 8% to 15% construction contingency in order to cover any construction mishaps.

• Leasing Agent & Property Manager: When selecting the appropriate leasing agent and property manager, the developer can rely upon a firm's knowledge of the local marketplace and experience with the specific product type. For some mixed-use projects, the developer might even consider separate residential and commercial leasing agents. The ideal leasing agent and property manager perceives intrinsic value in the building's architectural elements and is committed to promoting the building's unique character.

• Local Community Groups: While not technically members of the development team, local community groups and neighborhood associations should be sought out and engaged in dialogue during the feasibility phase of a project. By doing so, a developer determines up-front whether local opposition exists and has an opportunity to mitigate those concerns early in the design process.

• Market Study Firm: The developer as well as the lenders and investors want to know the achievable rents and market demand for a proposed development project. A market feasibility study can provide a comprehensive analysis of the proposed development project and location, a detailed competitive survey, and an in-depth demographic analysis. Since rents can fluctuate from one neighborhood to the next, the market study firm should be not only experienced in the particular market and property type but also familiar with the local neighborhood.

• Real Estate Appraiser: The role of the real estate appraiser is to provide objective, impartial and unbiased opinions about the value of real property. While all states require appraisers to be state licensed or certified in order to provide appraisals to federally regulated lenders, appraisers with the MAI and SRA professional designations have fulfilled additional educational and experience requirements and must adhere to the strict code of ethics and standards of professional conduct established by the Appraisal Institute. In addition, the real estate appraiser should be experienced in the particular market and property type as well as familiar with the local neighborhood.

• Real Estate Legal Counsel: Except for possibly the first-time developer, a real estate developer typically already has legal representation that specializes in real estate acquisition, financing, development, leasing, management and disposition. In addition, if federal rehabilitation tax credits are being used as a financing source, it is highly recommended that the developer hires an experienced tax credit legal counsel to structure the transaction and handle the tax credit syndication component.

• Structural Engineer: At the earliest opportunity, a structural engineer should perform a walkthrough and evaluate the building's structural integrity. For example, if the structural engineer determines that the building's foundation is unsafe or inadequate, the developer must be prepared to fix the foundation or walk away. As a result, the structural engineer is engaged at the beginning of the feasibility phase and, if possible, prior to acquiring the property.

Tax Credit Team Members:

• Historic Preservation Consultant: The historic preservation consultant completes the National Park Service's Certified Historic Preservation Application Parts 1, 2 & 3 on behalf of the developer. While both the State Historic Preservation Office and National Park Service review the applications, the State Historic Preservation Office provides advice and comment and the National Park Service makes the actual certification decision. As a result, when selecting a historic preservation consultant, it is advisable to choose one who has a strong relationship with the local State Historic Preservation Office and a long track record of successfully completing the National Parks Service's Certified Historic Preservation Application. In some cases, when the architect has the necessary expertise, the architect may also serve as the historic preservation consultant.

• State Historic Preservation Office: While not technically a member of the development team, the State Historic Preservation Office provides guidance on how to complete a certified historic rehabilitation project. It is highly recommended that a developer gets the local State Historic Preservation Office involved early during the feasibility phase. Once the State Historic Preservation Office approves the proposed rehabilitation work, the next step is to receive approval from the National Park Service.

• Tax Credit Accountant: The developer should not pay for the education of its tax credit accountant. The chosen accounting firm should be an expert in structuring stand-alone historic rehabilitation tax credit transactions and performing cost certifications. In addition, the tax credit accountant should have extensive experience preparing development budgets and financial projections.

• Tax Credit Guarantor: The tax credit investor requires a tax credit guarantor to guarantee repayment of the investor's tax credit equity in case of a tax credit shortfall or recapture. The tax credit guarantor may be someone who is intimately involved in the project such as the developer or, in contrast, someone whose only role in the project is to provide the tax credit guaranty. However, regardless of whom it is and one's level of involvement in the project, the tax credit guarantor must have sufficient net worth and liquidity to satisfy the tax credit investor's underwriting requirements.

• Tax Credit Investor: A tax credit investor, such as CityScape Capital Group, contributes equity into certified historic rehabilitation projects in exchange for the historic rehabilitation tax credits. Syndicated tax credit transactions require the tax credit investor to be admitted into a legal entity, such as a limited partnership or limited liability company that will either own the building or hold a long-term operating lease on the building. Syndicated tax credit transactions are highly structured, tax code intensive deals.

• Tax Credit Legal Counse: The developer should not pay for the education of its tax credit legal counsel. The single best predictor of how a tax credit transaction closing will progress is the developer's selection of an experienced historic rehabilitation tax credit legal counsel. The selected law firm should have substantial experience with structuring, documenting and closing standalone historic rehabilitation tax credit transactions encompassing all types of complex issues such as multi-tiered pass-through structures, tax-exempt use limitations and at-risk rules.

In conclusion, developers involved in rehabilitating historic buildings should promote teamwork, include experienced professionals, and expect the unexpected. A critical success factor is the developer's willingness and ability to assemble a strong team of experienced professionals to carry out the project. With a strong development team, the project may not only run more smoothly but also be perceived more favorably by investors and lenders while obtaining better terms in the process.

Robert Plotka, CFA is a Managing Director and Co-Founder of CityScape Capital Group, LLC based in Princeton, NJ. Mr. Plotka holds a bachelors degree in economics from the University of Pennsylvania and a masters degree in finance and marketing from the Marshall Graduate School of Business at the University of Southern California, where he graduated with high honors and received the Albert T. Quon University and Community Service Award. In addition, Mr. Plotka is a Chartered Financial Analyst. Mr. Plotka can be contacted at 609-951-2200 or robert@cityscapecapital.com Extended Bio...

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