Investing in Real Estate is all about managing risks. However, if you can’t measure risk, you can’t manage it. The difficulties in measuring and understanding development risks are the primary reason why Institutional investors and Real Estate investment firms are too often dependent on the Core commercial market for most of their RE investments. Those who fully understand risks, can measure it and have the resources to manage it will reap higher returns while they climb the risk ladder from Core to Core-Plus, to Value-Added to Opportunistic investment especially those in Development & Entitlement.
So why is it so difficult to measure and manage entitlement and development risks?
Experts will tell us a laundry list of reasons: Political risks, market risks, community NIMBY risks, governmental permitting risks, constructions risks, and systematic sector risks. Experts are correct from the perspective that it is difficult or impossible to conduct a Discounted Cash Flow model DCF on factors such as political risks or permitting risks. The traditional top-down risk assessment has serious limitations, however, such risks can be fully assessed from the ground-up by “walking” the entire process from visioning to completion.
We believe the primary cause of Development and Entitlement risks are structural deficiencies, internal frictions, and contradictions inherent in the typical development process.
Due to the complexity of the process, numerous consultants, subject experts, and governmental agencies will either collaborate or compete to move the project from inception to completion or demise. More often than not, such process is haphazard and reactionary. Environmental Consultants, Planners, Public Relations Consultants, Engineers, Architects, Marketing forecasters, financial advisors, and others will each contribute a piece in a multi-dimensional Rubik’s cube. In spite of its difficulty, the entitlement and development “process” has been re-invented an endless amount of times.
We at Zenith Consultants believe one possible and effective solution is “Integration.” Instead of the current segmented and fragmented “process,” a thorough early mapping of the approval process from envisioning until completion is very much possible. An integrated process will tie the initial proforma to plan development, design plans, cost estimate, and construction management allowing a robust and proactive measurement of risks.