Proceed With Caution: How To Avoid The Top Three Pre-Construction Risks
Joe Sugiyama is the Vice President of Pre-Construction at CA Ventures.
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Embarking on a new real estate development can be overwhelming for even the most experienced developers. Everything from getting a model to provide necessary returns to efficiently fitting your building design to your project site requires both financial and construction know-how. One area that is often lost during these early stages of a project is the pre-construction techniques that help identify and mitigate risk on a given deal. Even a perfect financial model can be quickly derailed by unexpected problems on site. Having a strong due-diligence program in place is the cornerstone of successful developments and can have a massive impact on a project’s overall returns.
Having a detailed pre-construction plan is a multi-faceted process, but there are three key risks that can trip you up if you’re not careful. Those pre-construction risks and how to best avoid them are detailed below.
Risk No. 1: Environmental Pitfalls
How to avoid it: Conduct the appropriate assessments early.
As soon as you’ve identified your site, a Phase I Environmental Site Assessment should be scheduled with a qualified environmental engineer. This assessment looks back at the history of the development site while also providing a current site assessment. The engineer will conduct an in-person visit to identify Recognized Environmental Concerns (RECs). These reports tell you if the site that you have selected has the potential for environmental risks like soil or groundwater contamination, and what your next steps should be from an environmental perspective. The nominal cost of this report is a small price to pay to protect your business from embarking on an untenable project.
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Risk No. 2: Unknown Easements
How to avoid it: Conduct a survey and applicable title searches.
One of the simplest steps that should be taken for every project is a title search that is incorporated into an American Land Title Association (“ALTA”) survey. Title reports are commonplace, but being able to properly interpret and understand this information can help determine if a site is worth the investment of additional time and resources. Your survey will provide the physical details observed on site and provide property line information. By incorporating the title information into the survey, you will also be able to identify easements that can impact where on your site you can build. City setback requirements, wetland zones, access easements and utility easements should all become apparent on your ALTA survey. Once you have this information, you can identify the need to negotiate with neighbors, vacate easements or adjust your design.
Risk No. 3: Electrical Utility Constraints
How to avoid it: Perform site audit with consultants and local power company.
As it relates to electrical and utility operations, there are two key risk factors that should be evaluated for every site. First, does the power available at my site meet the project’s energy needs? Second, are utility relocations necessary to construct the building? Both risks require inquiries with the local power company as well as support from a local dry utility consultant or civil engineer.
Once you have determined your building’s power needs, schedule a discussion with your power company to identify the availability of power at your site. Have your consultant fill out a “load letter” which outlines your building’s information and gives the power company the data they need to analyze your building’s impact on their grid.
To check if power line relocations are necessary, look for lines that are directly within the footprint of your future building as well as the lines adjacent to your site. To determine if an adjacent line will impact a building’s construction, use the typical OSHA requirement of 10 feet of clearance between the closest power line and the edge of the building, plus an additional five to seven feet for a working clearance. If your building footprint is within this 15–17-foot buffer zone, you likely need to perform a relocation or modify your building design. (Note that clearance can vary and should always be checked against local codes and directly with the power company.)
After determining what lines need to be relocated, coordinate with your dry utility consultant to help guide you through the process with your local power company. Relocation projects can easily reach seven figures as well as impact the project’s critical path, so it is essential to understand your site’s requirements very early on in your diligence process.
Any experienced developer will tell you that there are plenty of other things that can go wrong early on at your site — unknown geotechnical requirements, non-power utility availability and new city zoning ordinances, just to name a few. But by keying in on environmental, power and title risks, you and your team can quickly understand if the proposed site is worth investing further resources into or if it’s time to cut your losses and find a new project.
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