Architects can increase their value to building owners by incorporating project financial analysis into their planning and design services.
The 2003 Corporate Real Estate Survey, conducted by the Jones Lang LaSalle realty group, identifies financial performance of real estate hold-ings as one of the largest concerns in the commercial real estate industry today. To increase financial performance of their buildings, owners often turn to outside expertise for financial planning and guidance.
Traditional financial efforts were aimed at reducing overall cost per square foot and minimizing space requirements. In today’s high-performance environment, this response is no longer sufficient. Owners must focus on financial planning, portfolio analysis, capital budgeting, and return on investment—regardless of building size, function, or aesthetics.
The business climate of the early twenty-first century calls for more than a typical building “cost pro forma.” It requires a broader view that perhaps even looks at the owner’s properties as a portfolio in which each individual building has its own business plan and competes with similar buildings—whether owned by the client or the client’s competi-tors. This competition drives the expected level of financial perfor-mance in both private and public markets. For owners, each building becomes an economic equation.
In today’s more sophisticated development process, discussions of design and aesthetics may not occur until the costs and financial return expected for a building project have been decided. It is not uncommon for a project’s outcome to be determined during the first project meet-ings. When this happens, the architect’s contribution is frequently
rele-gated to producing construction drawings and picking finishes. Many developers apply a cookie-cutter approach to their projects, using the same footprint, details, and visual appearance in multiple locations. In some cases, however, the design may be varied for local market settings. In other cases, retail properties are developed with themes that are periodically changed to maintain targeted levels of sales and revenue.
Real estate development is increasingly viewed as an expertise that falls within the realm of real estate analysts and portfolio managers. In addition, real estate and develop-ment firms, along with general building contractors, are providing services ranging from
Project Financing and
Development Services
John W. Mason, AIA
JOHNW. MASONis the director of tax depreciation services with Avail Consulting in Houston, Texas. He advises corporate and institutional clients regarding the real estate services, tax depreciation, construction tax planning, and cost recovery involved in the acquisition, relocation, expansion, and construction of all types of facilities.
PROJECT FINANCING AND DEVELOPMENT SERVICES
Why a Client May Need These Services
• To estimate project financial performance • To provide a basis for development budgeting • To structure project financing
• To obtain project funding for new construction • To obtain refinancing of existing facilities
Knowledge and Skills Required
• Understanding of economic concepts and principles • Ability to perform financial analyses and comparisons • Ability to evaluate resulting data and interpret findings • Ability to relate findings to the building design process
and develop recommendations
• Ability to communicate findings and recommenda-tions to the client
Representative Process Tasks
• Define financial goals and objectives • Outline variables for evaluating alternatives • Develop financial scenarios and project outcomes • Compare outcomes with financial goals and objectives • Adjust initial requirements as needed to achieve
desired outcomes
Summary
Excerpt from The Architect’s Handbook of Professional Practice, Update 2005
master planning to design-build construction to property leasing. With their greater understanding of the programming, design, and construction process, architects who can also address the economic aspects of a project have a unique opportunity to provide greater value to their clients.
When a client is confident an architect has the client’s financial priorities in mind, the architect can play a stronger leadership role during early planning, when project fea-sibility is largely finance driven. By identifying opportunities and evaluating financial options for their clients, architects can better compete in today’s market environment.
C L I E N T N E E D S
Public corporations, private owners, government agencies, not-for-profit organizations, investment brokerages, and stock ownership plans are among the types of clients seeking financing and development services for their building projects. All of these clients have a common need to estimate the potential profit/loss results of a particular project over a given period of time. Projections of initial costs, operating expenses, and revenue streams must be compared with available data from competing properties. This information and other market demands are used to confirm a project’s economic via-bility. Beyond these comparisons, cost estimates for life cycle costs and exit strategies will ultimately influence or even dictate size, configuration, and budget for the project design.
Clients develop capital funding sources unique to the market sector in which they work. Inherent in each funding source is the initial cost of capital, the amount of money the capital could generate if invested elsewhere in the marketplace, and the period of time for which the capital is dedicated for use within a project.
Market factors significantly influence what owners expect from their investments in real estate. The market environment five years after the turn of the twenty-first century is influenced by the following issues.
Profit-driven, short-term focus.Driven by the need for continual growth, the busi-ness world demands ever-increasing profits and continually higher returns on investment. Owners generally seem to prefer short-term profits over long-term increases in value. Companies everywhere are looking for alternative ways to increase financial performance in the near term.
Increasing regulation and oversight.The demand for increased growth and profits has produced an extremely competitive environment. In response, some of those seeking to increase profit have taken to evading laws, bending rules, and ignoring ethics. Govern-ment and other regulatory agencies have responded by increasing regulation and over-sight. To stay in compliance but remain economically competitive, companies need specialized knowledge and experience to help them deal with the added layers of com-plexity introduced in this environment.
Growing competition.To remain competitive, companies today often expand beyond their core competencies to offer a range of related professional services. For instance, some real estate firms provide site selection and strategic planning services. Management and leasing companies may offer space planning and project management, and accounting firms perform real estate evaluation and construction consulting services. As competition increases, each industry sector becomes more competitive, and consolida-tion within market sectors produces companies that provide a broad range of services. The end result is a multitude of companies that provide seemingly similar services at increasingly competitive prices.
Niche expertise.To remain competitive in these homogenous markets, service providers must differentiate themselves from other firms by offering a unique set of ser-vices. At a time when different aspects of the building process are being marketed by a variety of companies, those that combine related niche areas to provide a full range of services related to project development will be most competitive.
• Federal, state, and local governments with tax assessment authority typically gen-erate funds for large capital projects by issuing long-term bonds, which provide fixed rates of return at the end of a defined period. For state and local govern-ments, these bonds are generally tax-exempt obligations.
• Smaller state, county, and municipal governments; school districts; and local enterprise zones issue similar bonds or provide tax incentives to developers to offset project costs and enhance project returns.
• Investment funds, pension funds, insurance companies, and real estate invest-ment trusts look for stable, long-term income streams from projects. These types of companies usually finance projects with money from the internal accounts of their investor members as well as by generating revenue through loans to outside borrowers. Funds leverage their investments to different degrees in order to influ-ence their return on investment.
• Corporations and private owners often use their own capital for investment; borrow from traditional sources such as banks, insurance companies, and mort-gage companies; or look for third-party developers to construct their projects.
Factors That Influence Project Financing
Outside influences can either contribute to or take away from the overall financial per-formance of a building project. Governments may offer benefits such as entitlements, investment incentives, or tax breaks. Reductions in the operating expenses for building mechanical and electrical systems can significantly reduce initial project investment requirements and increase cash flow to improve the rate of return. Conversely, overall economic performance could decrease when government regulation and taxes are increased.
Following are some of the factors that can influence the economic analysis of a pro-posed project:
•Development incentives.To encourage business development and construc-tion in certain geographic areas, government entities may offer various financial incentives. Tax abatements, tax increment financing, development grants, utility credits, below-rate financing. and deferral of payments are among the incentives often included in the financial modeling of a project.
•Depreciation.Traditionally viewed as a non-cash expense on the balance sheet, depreciation is intended to provide a way to recover project costs resulting from age, deterioration, and economic obsolescence. Often used by the federal govern-ment as a tool to stimulate growth in the economy, a reduction in depreciation periods allows a business to recover its construction and investment costs more quickly. Recent trends in depreciation include reclassification of recovery class-lives and enactment of “bonus depreciation” legislation, which significantly increases the tax savings resulting from depreciation. Historically viewed as a means of encouraging business development and construction, depreciation can provide a major boost to the financial dimension of real estate development by accelerating depreciation deductions and tax savings to the earliest years of a pro-ject’s life.
•Increasing property taxes and related costs.New state and local government regulation, higher taxes, and other added property costs have a negative effect on overall economic performance. Examples of these costs include sales and use taxes, property taxes, utility fees, title fees, and increased permit costs. Some juris-dictions may impose personal property taxes on business or real estate assets.
Identifying Client Needs
Client financing sources and costs typically are related to the nature of a client’s invest-ment strategy. For example, some developers rely on profit derived from steady streams of annual income from properties they own over long periods. Other developers construct projects and immediately sell them for a marginal gain. Another strategy is for developers
It is far easier for the architect to project the future cash flow of a project than it would be for an economist to determine the underlying cost of a building design and its internal working systems.
to act as intermediary brokers, buying from builders, selling to owners, and taking their profit from the margins between the purchase and sale prices. Financial strategies vary as much as clients, and it is not unusual for a single client to develop multiple projects using several different strategies. Through experience, clients determine which capital sources best allow them to maintain steady, high-level financial performance.
During early phases of project development, clients identify capital options and the financial parameters of their sources. They develop a series of economic illustrations, either internally or by hiring an outside consultant. If a client is considering multiple design options, multiple financial evaluations will be required.
Considering the initial investment of funds needed to design and construct a pro-ject, each client must ask the following questions:
• Is the value of the project greater than its cost?
• Does the return on the capital invested in a project meet its expected level of per-formance?
• What are the economic risks associated with the plan?
• Do the anticipated economic results merit continuing with planning, design, and construction?
• Do available market financing alternatives coincide with the client’s internal finan-cial and accounting objectives?
Regardless of the investment profile or source of capital funding for a specific type of project, the common need of any client is to measure the expected financial perfor-mance of a project. This can be done by carrying out the following steps:
• Define the initial planning requirements.
• Develop scenarios depicting alternative financing arrangements. • Outline variables common to all alternatives.
• Study various scenarios to determine the financial outcome of each.
• Compare potential financial outcomes with market-driven financial goals and objectives.
• Redefine the planning and design requirements to produce the desired financial outcome.
When an architect talks with a client on an ongoing basis about a project’s financial aspects, this interaction strengthens the client-architect relationship, demonstrates the architect’s value in all aspects of project planning, reinforces the architect’s role as a leader in the project process, and ultimately gives the architect more service opportunities.
S K I L L S
To effectively incorporate financial analysis services into building design services, an architect needs to have a basic understanding of financial concepts and economic princi-ples, as well as the ability to successfully engage, collaborate, and work with financial professionals.
Understanding Basic Financial Concepts
The most fundamental financial concepts include the time value of money, the cost of capital, and ratios relating cost and benefit. Tools for evaluating these concepts include discounted cash flow analysis and a range of metrics for comparing the results of dif-ferent approaches.
Discounted cash flow analysis is a methodology that quantifies the time value of money by using the techniques of compounding and discounting to manipulate cash flows forward and backward through time. The future-value calculationuses com-pounding to project a current dollar value forward to determine how much it will be worth at some point in the future. The present-value calculationuses discounting to determine today’s fixed dollar value of an amount from some point in the future. These
calculations facilitate decision making about expenditures based on future results and make it possible to compare alternatives on an equivalent basis.
Real estate analyses simply compare project investments with the amount of profit the same money might have earned through other investments. For example, a com-pany’s basic capital expenditures can be measured against other company investment options or returns from investment in other improvement projects. Following are methods used to measure the effectiveness of investments:
•Simple payback (SP)is the value of the initial investment divided by the annual return:
SP = Initial Investment Annual Return
If the annual return on an investment was $50, it would take two and a half years to recoup an initial investment of $125.
$125.00
= 2.5 years $50.00
•Return on investment (ROI)is the value of the annual return divided by the initial investment:
ROI = Annual Return Initial Investment $50.00
= 40% $125.00
• Present value (PV) is the calculation used to determine the value today of a given amount from some future point. PV is the calculated sum of all future cash flows over time when discounted to the present using the most appropriate market discount rate.
• Net present value (NPV) is the calculation used to determine the value today of a given amount from some future point minus the initial investment amount. • Internal rate of return (IRR) is the calculated discount rate at which the
pre-sent value of all future cash flows is equal to the amount of the initial investment. Many of the mathematical functions required for discounted cash flow analysis and com-parison metrics are available in standard retail software packages. All financial and accounting software packages, as well as standard numerical software such as Excel and Lotus, can be used to calculate these basic economic measurements.
Using Financial Evaluation Software
Most of the numerous packaged financial software programs on the market allow inser-tion of a range of evaluainser-tion variables, permitting concurrent analysis of several financial scenarios. Many programs also allow the user to enter data defining the desired financial end result of a project so the program can determine a set of possible starting parame-ters. More sophisticated software packages can display results in tables and bar charts.
Different programs are available for different types of real estate valuation, such as retail, office, or industrial developments. Some programs are designed for a basic level of analysis, such as evaluating one or two sets of variables at a time (e.g., the loan rate and the time needed to reach the break-even point). This type of software is most commonly used for residential transactions or small commercial projects and costs less than $100.
Other, more sophisticated programs are used to evaluate commercial projects of a more complex nature, ones in which architects are more likely to be involved. These programs allow concurrent comparisons of such variables as loan rates, discount rates,
income streams, expenses, higher levels of capital, longer periods of time, and more extensive cost breakouts. The most basic of these more rigorous programs costs between $150 and $200. These programs can be upgraded by adding modules with fea-tures for generating business plans and complex graphic output and preparing deliver-able reports in packaged formats.
For more specialized needs, consultants can tailor custom software packages. Offering the highest levels of analytical prowess, customized software can output data in various formats for different graphics and CAD packages. They also can import and use data from cost-estimating software. The cost for customized software is high, but for firms with a high volume of financial analysis work or the need to provide analyses simultaneously for multiple clients, the investment may be worthwhile.
Real estate financial analysis involves more than acquiring software programs, plugging in a few numbers, and running a pro forma. Most of the data for these evaluations are unique to individual clients, their sources of funding, and the characteristics of the local market environment. This specialized information is obtained by developing strong working relationships with clients over time. Most important, the success of financial analysis depends on the user’s ability to understand what the end results mean, and to use critical thinking to make the adjustments necessary to achieve the objectives desired by the client.
Relating Financial Analysis to the Design Process
Incorporating economic modeling early in the design process can shorten overall devel-opment time, increase the accuracy of projected costs, and ease the process of getting
Project cost estimating is based on knowledge of the cost to design and construct a building design, the internal systems needed for its operation, and the costs of each component. This information allows the architect to estimate project costs based on area, volume, component costs, detailed item costs, and so on. Cost estimates are prepared and updated at key stages in the design process. Using this information, changes may be made in project design, scope, or specifications to keep the overall cost of a project within budget.
Like cost estimating, financial evaluation can tap into the architect’s knowledge of building costs. However, in this case, these costs are related to a series of financial vari-ables to determine the anticipated financial outcome of a project. Financial analysis con-siders the estimated project construction cost, financing costs, and anticipated cash flow to determine how quickly initial investment costs can be recouped and a profitable income stream reached. Financial projections can be updated throughout project devel-opment to reflect changes in completion cost, lending rates, and market competition or to provide a different rate of return for investors.
Cost estimating requires the architect to be familiar with building material and labor costs, as well as local market trends that will have an impact on the construction cost. Depending on the project duration, cost estimating must anticipate cost increases due to inflation and material/labor escalation.
Financial evaluation requires familiarity with economic markets, financing costs, leasing rates, occupancy costs, and sales costs of similar projects. In a financial evalua-tion, the financial goals of a project are stated in their present value (discounted). This allows current construction and market cost factors to be adjusted so desired outcomes can be reached. Project costs are then compounded to determine if future financial goals can be reached or if further adjustments to current project costs are required. Fluctuating financial market conditions can affect project costs and require changes in the design in much the same way that changes in material and labor costs can affect project cost.
Cost estimating services are generally concluded when construction is complete. Financial analysis, on the other hand, continues after completion of construction to better position a project within the local real estate market and to improve financial perfor-mance on a day-to-day basis when measured against competitors.
funding commitments by providing management and investors with clear conceptual footprints and financial pro forma statements for achieving desired investment objec-tives. By examining the economic aspects of various design concepts, the architect can give the owner a greater range of choices to evaluate. When design and economic mod-eling skills are combined, the result makes it possible for building owners to identify nonperforming projects earlier, resulting in less development expense. To provide this service, an architect must be able to estimate the cost of constructing a design, outline the basic project economic performance goals, and then determine what evaluations are required to calculate future values and returns on investment.
Working with Financial Professionals
Different financial knowledge and skills may be brought to bear at different points in the process of planning, designing, and developing building projects. Land appraisers, prop-erty valuation experts, loan underwriters, and performance analysts can address their narrow fields of expertise, but ultimately they cannot speak to the overall process of building development, much less to the way in which development variables will affect the final occupants or the marketability of the building.
To successfully work with financial professionals, an architect should develop a basic understanding of the following:
• How overall changes in the economy affect property values • Day-to-day influences of the financial market
• How the market for stocks, bonds, and alternative investment options influences interest rates
• How interest rates affect the economics of projects
• Various construction loans, permanent loans, capital loans, and mortgages For a firm wanting to add this service to its offerings, there are several ways to gain the expertise needed. Many project managers already possess budgeting, cost-estimating, and management skills that can be readily supplemented with relatively minor training in financial analysis. Or, the firm can make such expertise a qualification for new-hire candi-dates. If the firm’s backlog of work does not warrant hiring a full-time staff member with a financial background, an alternative solution is to have an experienced financial profes-sional provide the services on a consulting basis.
P R O C E S S
Conceptual master planning, programming, and design phases typically contain mile-stones to evaluate a project from the owner’s financial perspective. At specific points in the process, comparisons may be performed for each proposed design option or scheme. Each analysis applies alternative variables to test outcomes for factors such as anticipated project costs, length of investment period, costs of capital, and rate of return based on market economies. The results are compared to arrive at a financing approach that best meets the desired goals of the owner, or to determine if project parameters need to be redefined and then analyzed again. The basic steps of financial analysis for a building project are described in the following text.
Step 1: Define initial financial goals and objectives
Early in design, when project area, footprint, and height are still conceptual, cost con-straints and economic performance goals are plugged into simple spreadsheets to enable a basic comparative analysis of different design approaches. A range of building size and cost variables are then tested with variables for finance rates and estimated market rental rates to determine if a project of a given size and cost can financially com-pete in the local marketplace. The initial analysis contrasts the general costs to deliver a building against the projected return on investment to indicate how much time would be required to pay off initial costs.
In today’s competitive environment, architecture firms can distinguish them-selves from their competitors by combining financial evaluation modeling with their core services.
Architecture firms looking to offer project financing services often seek the skills of a qualified financial consultant. Selecting such a consultant is not unlike finding consultants for other specialized services. Issues include selection criteria, how to find a consultant, compensation, and contractual matters.
Selection Criteria
Some factors to consider in selecting a financial consultant include the following:
Ability to work with the project team.The consultant must be able to orchestrate the various—and sometimes opposing—needs of team members. Sensitivity to design and aesthetics as well as the projected financial results of a project are important.
Long-term perspective.Many projects require several years to develop, thus market-driven financial cycles can change the economic outlook of a project several times before it is complete. The ability to envision and monitor long-term results during short-term business cycles can smooth the financing process and make it easier to maintain a consistent project budget and economic performance profile.
Familiarity with construction costs.Familiarity with con-struction cost estimating provides more flexibility for adjusting project expenditures to fit within economic constraints.
Experience with project type.Although experience with specific project types is always beneficial, financial evaluations are generally performed in the same way regardless of project type (e.g., retail pro formas and office building pro formas are typically performed in a similar manner). However, analysts who specialize in specific market sectors, such as hospitals or industrial facilities, can bring added insight to a project. The level of expertise needed to perform an adequate analysis of smaller projects can usually be provided within the firm, while more complex capital projects may require extensive, special-ized expertise that only a dedicated professional can provide.
Day-to-day experience in the market.Familiarity with the nuances of complicated debt and capital sources, market factors, financial returns, and risk issues associated with con-struction and permanent loan financing is critical. Consultants involved with these matters on a daily basis may be more familiar with the solutions of competitors, be better able to suggest a broad range of solutions, and have access to more resources.
Collaborative skills.Interaction between the consultant and design team members can result in more effective finan-cial decision making. This interaction, with the development of alternative solutions, can give the team the ability to achieve financial goals while maintaining design quality.
Where to Locate Financial Consultants
An easy way to find real estate financial analysts is by con-ducting a search on the Internet or contacting one of several national trade associations:
• The National Council of Real Estate Investment Fiduciaries (NCREIF) maintains a database of qualified professionals per-forming services across a broad range of project types (www.ncreif.com).
• The National Association of Real Estate Investment Man-agers (NAREIM) maintains a list of qualified professional members and provides various seminars and other contin-uing education programs (www.nareim.org).
• The Mortgage Bankers Association (MBA) provides training and resources for professionals who provide various mort-gage and capital services (www.mbaa.org).
• The capital markets groups of regional commercial real estate organizations can offer valuable market insight as well as the analytical skills necessary to validate financial assumptions and models.
• As with all service providers, the best referrals come from happy clients. Obtaining recommendations from clients will identify candidates that have performed well for them. Other referral sources include companies that provide loans, equity investments, or other project resources.
Compensation for Services
Fees charged for financial consulting vary. Compensation for financial consulting services depends on the scope of work, number of evaluations required, time needed to perform the evaluations, and cost per evaluation.
Design or management consulting firms providing the ser-vice in-house or on a consulting basis can bill at a higher level than their standard hourly compensation rates. Financial analysis services can be provided on a fixed-fee basis based on the number of evaluations to be performed. Mortgage com-panies, capital investment firms, and other financial lending companies often charge a flat fee based on a percentage of total project cost or the amount to be financed.
Consultant Agreements
Guidelines for entering into contracts with financial consul-tants are similar to those for other project consulconsul-tants. Refer to AIA Document C141™, Standard Form of Agreement Between Architect and Consultant, or AIA C142™, Abbrevi-ated Standard Form of Agreement Between Architect and Consultant.
Financial consultants generally carry professional liability coverage. For more complex projects with greater risk, levels of coverage can be increased.
Step 2: Refine variables for alternative evaluations
Generally, three sets of variables are continually refined and analyzed early in the building development process: building area, building cost, and return on investment. Changing any of the variables will change the cost required to bring the project to market, and ulti-mately the time needed to recoup development costs. Increasing the area or cost will increase the time needed to achieve the desired return on investment. Conversely, higher interest rates or lower occupancy rates reduce the return on investment and will necessi-tate a reduction in project size and cost. If the reduced return on investment falls below the financial goal threshold, the project may be canceled or put on hold.
Step 3: Define investment scenarios and evaluate outcomes for each
Depending on the stage of the development process, a given set of variables is analyzed and results are projected for upper, lower, and median performance levels. Testingdif-The financial variables of a project (e.g., revenue, operating costs, and financing rates) are projected over the life of the project to illustrate how long it will take to recoup ini-tial development costs and generate profit. The top chart is a summary of projected cash flow for an office building project derived from detailed analyses. Below it is a graphic representation of the same data. 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 TOTAL LEASING AND CAPITAL COSTS TOTAL OPERATING AND LEASING AND CAPITAL COSTS TOTAL POTENTIAL GROSS REVENUE $0 $2,000,000 $4,000,000 $6,000,000 $8,000,000 $10,000,000 $12,000,000 $14,000,000 $16,000,000 Year Dollars
ferent loan amounts, interest rates, payback periods, and equity investment levels pro-vides a range of options from which a client can choose. Early projections of market per-formance and borrowing rates will define the building size and cost ranges, as well as anticipated levels for return on investment. Intermediate analysis projections refine pro-ject cost and market occupancy rates and confirm propro-jections of the rate of return.
Step 4: Compare analysis results with financial objectives
Projecting current costs and anticipated market conditions allow comparisons with the initial financial goals of the project and the time required to reach the desired results: periodic income stream, annual cash flow, operating costs, repayment of loans and other investment costs, profit levels, equity distributions, and ultimately, the ending return on investment. Market demand for space, rates for occupied space, operating costs, and other incentives must combine to create a positive financial outcome.Step 5: Adjust initial requirements and retest as needed
When market conditions and financial variables change during a project, adjustments to the original financial objectives may be necessary. To maintain performance within the required range of objectives, financial variables may be adjusted by finding a lower bor-rowing rate, extending the length of the payback period, or increasing the amount of equity required of participants. If the ability to change the financial variables is limited, adjustments to the building size and/or project costs must be made to keep overall per-formance in balance. This could result in a smaller project, with a decreased cost of con-struction. The length of the investment payback period as compared to the initial costs of a project provides the economic incentive that moves a project forward.
Making trade-offs and shifting priorities between design, cost, and financial perfor-mance makes it possible to produce a result that both meets the owner’s requirements for a quality project and fits within the financial constraints of the marketplace.
The spreadsheet on page 118 shows the input variables used to perform a financial analysis of an office building project. Based on these data and investment assumptions, the adjacent spreadsheet shows an analysis of the after-tax cash proceeds from the sale of the building.
M E E T I N G C L I E N T E X P E C TAT I O N S
Incorporating financial analysis into the project delivery process enhances the value of an architect’s core services and provides an opportunity to respond to the broadest range of a client’s financial needs. Offering financial services can also help improve the competitive position of architects and reinforce the architect’s role as a key project team member, even before a project becomes known in the marketplace.
The deliverables generally associated with financial analysis vary according to the stage of project development and the ultimate use for the analysis. Simple spreadsheets provide a basic method of comparing variable factors that is suitable for early planning and testing of concepts. These analyses and summary tables are generally three or four pages in length and consistent in format.
A report used to obtain loan financing or capital for a project is usually more formal and typically includes a market-oriented business plan, estimates of project costs, and several illus-trative analyses that demonstrate the economic viability of the project in a range of market conditions. This report also includes any early planning analyses and narrative text that describes the project. The size and detail of a formal report is determined by the size, cost, and complexity of the project and anticipated market conditions during its development.
For loan purposes, the formalized financial deliverable generally contains a description of the market opportunity and the benefits to be derived from the project. The report identifies the target market and competitors and their weaknesses, and outlines market needs to be fulfilled by the project and how the design concept will meet these needs. Several sets of spreadsheet comparisons are included to demonstrate the project’s finan-cial viability in a variety of market conditions, including changing interest rates, cycles in occupancy demands, increases in operating costs, and so on.
Depending on the length of time needed to develop a project, some deliverables may need to be updated or revised several times to reflect changing conditions in the general economy. For example, financial markets can swing widely over short periods of time, resulting in erratic financial conditions that can be extremely competitive and less profitable.
“Project Financing and Development Services” was originally published in
The
Architect’s Handbook of Professional Practice, Update 2005
, ©2005 by the
American Institute of Architects, published by John Wiley & Sons, Inc.
The AIA provides a contract document designed especially for alternative
architectural services.
B102–2007, Standard Form of Agreement Between Owner and Architect without a Predefined Scope of Architect’s Services
