As a design consultant looking to add value to a development or differentiate your firm there are four main financial levers you can pull:
- Increase revenue
- Decrease expense
- Increase efficiency
- Compress schedule
In this post you will learn the basics of these four financial levers. If you are interested in going deeper on each lever, let me know in the comments!
Financial Lever #1: Increase Revenue
Revenue increases in a development project take two main forms. You can increase operational revenue or increase capital event revenue.
Increases in operational revenue comes through increasing rents for the project. If you can increase rent and keep costs the same, you have created financial value in the project.
You can also measure increase in revenue through a capital event. If the project sells for more money at the end of your client’s investment lifecycle, you have created a measurable financial impact with your design. If you can help your client increase the demand for their building or lower risk – either in the building or tenant mix – you can Increase value at time of sale. A building in high demand will be reflected in a low cap rate at sale compared to peer buildings.
Financial Lever #2: Decrease Expense
Similar to increasing revenue, but on the opposite side of the financial ledger, as a designer you can work to reduce expenses.
Development project expenses also come in two forms. Your design can impact operating expenses (OPEX) or capital expenses (CAPEX).
OPEX includes all expenses related to the ongoing operations of a property. Examples include maintenance, energy, utility, tax, and management costs .
One thing to note about OPEX savings, is you need to understand who receives the OPEX savings. Depending on the structure of the lease in a development, savings may go to the tenant or the landlord.
For example if you can install a more expensive flooring choice that is easier and less expensive to maintain over time, you can create value through reduced OPEX. In a full service office lease, energy efficiency upgrades can create an OPEX savings for a landlord, while in a Triple Net lease the savings go to the tenant.
Capital expenses (CAPEX) include one time expenses for original construction as well as replacement costs throughout the life of a development. A roofing system that is less expensive to install or that lasts longer can provide a CAPEX savings to the project when it comes time to replace.
Financial Lever #3: Increase Efficiency
Project efficiency can be measured through building efficiency or site efficiency. Energy efficiency belongs in the OPEX category, and would be a part of the Lever #2 discussion.
Site Efficiency includes all measures of utilizing the maximum amount of a given site while balancing financial impacts of that utilization.
Creating a site design that allows for more building area or lower land development cost per rentable square foot of building are both measures of site efficiency.
Building efficiency is measured by the total usable square footage of a building as a percentage of gross square footage of space in the building. The typical measure of the efficiency of a building is the core factor.
Financial Lever #4: Compress Schedule
The final financial lever is time. If your design or design process can reduce the amount of time in municipal review and approval, design, construction, or lease-up, the development will perform better.
You can reduce the time spent in municipal approval and review thorough understanding of the local municipal requirements of your designs.
You can reduce design time through streamlining your processes.
You can reduce construction time through your design by specifying components and systems that are quick to purchase and deliver. You can also improve construction timelines with design by choosing systems and finishes that install easily and quickly with minimum potential for rework.
One often overlooked time period that designers can impact is the leasing schedule. Leasing can improve through faster signing of leases and faster move-ins. If a design is more attractive to end users, leases will get signed more quickly. If your design allows for a faster move-in once a lease is signed, the leasing schedule is improved and financial performance of the development is improved.
All else being equal, the faster a project is built and/or leased up, the more the IRR for the project will improve.
Conclusion
By understanding the four financial levers that you can pull as a designer to improve a development project, you will be able to:
- win more projects
- design better places and spaces
- create happier clients
If you have any questions about these levers, you can drop a comment below or send me an email at [email protected]!
