When it comes to ground up build to suit development for your space, the popular saying “ignorance is bliss” could not be more wrong. You can’t steer clear of what you’re not aware exists.
So, let’s take a look at the top hidden costs often associated with build to suit construction and discuss how best to avoid them.
If a design error results in needed changes down the line, it will inevitably eat up both cost and time from the ground up development project. Also falling within this category would be an inefficient design as the layout can drastically affect materials and labor.
Example: Designing a chiller in a discount retailer store to be installed too far from the main service equipment can result in its circuit needing to be much longer and more expensive.
Avoid by: Hire experienced engineers and experts that are up-to-date on the applicable codes will come into play. Also, finalize the design earlier so that the timeline can be determined more accurately.
Hard & soft costs
In the commercial real estate industry, hard costs refer to the tangible materials that make up roughly 70 percent of a ground up construction project’s total budget, while the soft costs are intangible and not directly related to the physical building.
Examples of hard costs: shell, parking, site work and landscaping, HVAC, electrical, labor
Examples of soft costs: fees for architecture, engineering, legal, permits, inspections, environmental site assessments
Avoid by: Understand what both types entail so you can account for everything. The accuracy of an estimate can make the difference in whether or not a project will be feasible. So, research the historical information, bids, proposals, and the right partners to help provide stable estimates.
At times change may be unavoidable, and change orders are no exception. However, a change order for correcting a construction error during the final inspection, for instance, leads to an additional expense that could have been avoided.
Example: Just knowing the available utilities and potential conflicts that could arise — without knowing specific locations may lead to a change order.
Avoid by: Find out early if there are any overhead power or telecom lines that may need to be moved or underground due to height limitations of that area. Take measures to anticipate and reduce by establishing an initial change order process early and meet with stakeholders regularly.
Higher occupancy costs
After build to suit construction completion, there is still the risk of higher occupancy costs that may have been impacted by any increased capital spent on development. Aside from the direct correlation with rent, the amount for occupying the space includes real estate taxes, personal property taxes, insurance, depreciation and amortization expenses.
Example: If overruns occur or other aforementioned unexpected costs, a developer could potentially eat the cost to show your relationship is valued rather than raise your rent, depending on the circumstances.
Avoid by: Educate your team on all the variables that may influence your occupancy costs or partner with a professional commercial developer that has experience and a proven track record of keeping rent down for the tenant.
It can be said that “with great risk comes great reward” when it comes to ground up build to suit development. You should be aware of both the common and not as obvious hidden costs that may be associated with it. So, keep these tips in mind to keep costs down and avoid unnecessary fees from being tacked on.