This story is a forensic accounting of the time and dollars involved in taking a modest commercial development from a dream to a reality. I remember when I began the project with my partner, Chris Whitson, and promised myself that after all the dust settled I would go through the process of looking back and quantifying the days and money that were spent to get our modest undertaking to where it is today – almost finished!
To start the process, I took a moment to go through the hundreds of electronic files that are stored on the hard drive of my computer. Now I realize that it’s less than trivial to anyone under the age of 30, but I am still amazed at the everyday technology represented by a personal computer. In days past a hard copy archive of any development project consisted of thousands of sheets of paper, all different sizes, and required at least two to three drawers in a run of the mill metal filing cabinet. I now know that the electronic archive of the project that is the subject of this exercise contains 1.25 gigabytes and it all fits within a small part of the computer that’s on my lap as I type. I also now know that the earliest electronic file in this mass of bits and bytes is a letter written to Chris that initiated our partnership and it is dated August of 2006. Further review of all this electronic data reminds me that we really started to get going on the project in November of 2007. As we often see written in this business, this is the true point of beginning.
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| Riverfront Plaza |
Before I get into the economic details, I want to take moment to describe the physical scope of our development that we call Riverfront Plaza. The project is located along the north side of Irvington Road, just west of I-19, in the southwest region of metropolitan Tucson. The entire site is zoned unrestricted C-1 (City of Tucson) and contains approximately 7.0 acres. Before we got involved there was a 10,000sf multiple tenant retail building constructed on the site in 2000. Based on our preliminary planning we intended to develop 4 more commercial pads on the remainder of the site that would accommodate a free standing restaurant/bar building, two multiple tenant retail buildings and an 18,000 square foot two-story professional office building.
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| Lot 3 – 18,000sf multi-tenant professional office building (50.0% occupied) |
Why did this seemingly simple process take so long? On the public sector side of the line, I attribute a significant allocation of cause to the inefficient, mostly obsolete and overly zealous design review process that was the aggravating norm from a couple of years ago. On the private sector side of things, the fact that the quality control associated with the submittal packages prepared by our engineering consultants was generally poor is also to blame. Lastly, and from the “The Buck Stops Here” perspective, I need to take a lot of the responsibility in that, retrospectively, I lacked the recent experience and general knowledge of the overall process to the point that my supervision of the city regulated entitlement process and the product coming from our engineers was not what it should have been. We can file all this into the drawer marked “Live & Learn”.
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| Lot 1 – 6,300sf Buffalo Wild Wings Grill & Bar |
Now I’ll move on to the economics of the deal. To present this perspective, I am going to focus specifically on the 18,000 square foot professional office building that I mentioned earlier. We began construction on the shell portion of this building late in 2009 and finished it in April of 2010. Tenant improvements for the 9,000 square feet of preleased space were completed late in 2010. In terms of land costs, site design and entitlement costs, as well as the cost associated with the necessary site improvements, a summary of the costs allocated to this building are as follows:
Land (25.0% allocation of total) $265,000
Site Entitlement Cost (25.0% allocation of total) 60,000
Site Improvement Cost (25.0% allocation of total) 260,000
Total Site Related Costs $585,000
Note: Approximately $9,000, or about 15.0%, of the site entitlement costs were in the form of 23 different fees paid to governmental entities during the site entitlement process.
In terms of vertical costs, or those costs directly associated with constructing the building, we spent approximately $3,125,000 which breaks down as follows:
Building Design & Other Soft Costs $650,000
Building Hard Costs (Shell & TI’s) 2,475,000
Total Site Related Costs $3,125,000
Note: Approximately $180,000, or about 27.7%, of the “Building Design & Other Soft Costs” were in the form of 15 different fees paid to governmental entities during the building plan approval and permitting process.
Therefore, when all tenant improvements are in place (we still have 9,000 square feet in shell condition), the total cost of the building will come in at about $3,710,000. Of this amount, $189,000, or about $10.50/square foot of building cost, was in the form of 38 checks written at 38 different times to a variety of city, county and state entities in order to be granted the “privilege” to commence construction. The fees that stand out because of their magnitude are as follows:
· $110,000.00 paid to the City of Tucson for impact fees related to the office use designation of the building.
· $28,000.00 paid to Pima County Waste Water Management for sewer connection fees associated with the fixtures designed into 4 common area restrooms and a janitor closet.
· $16,000.00 paid to Tucson Water for a 2” water meter hook up.
· $10,557.43 paid to Tucson Water for a “permit and inspection fee” related to the permit and inspection related to the construction of underground water lines that we built and paid for to serve our site.
The fee that stands out the most in terms “how did they figure that one out” was the $10,557.43 fee paid for the permit and inspection of underground water line construction. Again, this fee is related to the construction of onsite and offsite water facilities that we paid for entirely – nothing was “given” to us. Not only do I consider the amount to be ridiculously high, insult was added to injury when it was explained to me that Tucson Water was in a “cost recovery mode” and therefore part of the amount was a $57.43 charge to recover the cost to process the permit and my payment. Based on this explanation I’m thinking that medical marijuana must have been available to some long before others! All in all, based on the appraised value of the building at the time of construction, the total of all of the governmental fees was equal to our project profit.
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| Lot 4 – 10,000sf multi-tenant retail building (100.0% occupied) |
After my review I am left with the conclusion that the public and private sector elements of our industry need to come together to evaluate and refine almost every aspect of how we do business. We should collectively endeavor to identify and eliminate all inefficiencies associated with the entitlement and design review processes employed by all jurisdictions in our community. Our goal should be to redesign the present public/private business model so that it is less costly in terms of time and dollars. The good news to this is that I am seeing signs almost every day that this process has begun and we just may have things figured out when market conditions again justify new development activity.
Scott Soelter
Senior Vice President
Grubb & Ellis Tucson
520.321.3344
