What is Your Exit Strategy?

By Tony Whitaker

A real estate development project is never an end in itself, but is always a means to achieve some greater outcome. The goal could be to expand the family business, to provide affordable housing, to generate a profit on invested assets, or one of a thousand other good reasons. In any case, the investment in the project is expected to provide some benefit to the investor. This benefit can be directly enjoyed (occupied), used to generate an income stream (leased), or converted to cash (sold). The term “exit strategy” refers to the manner by which an investor intends to realize a return on the money, time, energy, and intellect expended for the project.

For some projects, the exit strategy requires leaving and monetizing the project at some partially completed stage, or soon after completion. For others, realizing a return on investment includes holding and using the completed project for the long term, perhaps indefinitely. In every case, a design consultant must understand the client’s exit strategy in order to deliver an appropriate design that meets project objectives. Design decisions are replete with variables that relate to quality, durability, finished appearance, market appeal, initial cost, and maintenance costs; all of which must be properly balanced in view of the client’s project-specific preferences. These preferences will naturally be influenced by the client’s intended method and timing for achieving an investment return.

For example, a client may intend to exit a project without constructing any building or site improvements. A project of this type may simply include taking limited actions that increase a property’s value or appeal to others, and then selling it. A variation on this theme could include constructing selected site improvements such as roadways and utilities, for speculative sale of improved building lots to others. This is a common development approach for residential uses (subdivisions), commercial uses (shopping centers with outparcels), and mixed uses (planned developments). In these cases, unknown parties will assume ownership of an interim condition and complete the site and building development. For these types of projects, a consultant will generally make decisions that preserve project flexibility in order to appeal to a diverse range of potential end-users. This may be done by pursuing flexible zoning parameters for the property, maintaining appropriate lot sizes and proportions, preparing a rough-grading design with compacted building pads, providing flexibility for the number and location of driveway access points, establishing conservative stormwater management strategies and/or infrastructure, setting sanitary sewer and storm sewer elevations as low as practical, providing means to take full advantage of the public water system’s pressure and flow characteristics, etc.

If a client’s strategy includes holding the completed project long-term, maintenance considerations and life-cycle cost analysis will naturally be of more concern than if the intent is to build and sell relatively quickly. For these types of projects, a client may want to consider using a more durable pavement design, energy efficient features such as geothermal heating/cooling or water re-use systems, low-maintenance landscaping, and provisions for future facility expansion. Typical examples of this type of project might include a church or an owner-occupied commercial building.

Some projects are intended to be sold or leased to a very narrow range of user types which may establish the project’s quality level and visual character, or may require specific design features. For example, an office building that will be marketed with a Class A designation will require a relatively refined treatment of finished surfaces and landscaping, and perhaps a more aesthetic stormwater management solution, than would be expected for other types of office or flex-space properties. An office building shell that will ultimately be upfit for a medical services user will generally require a higher level of pedestrian and wheelchair accessibility than required for non-medical office uses.

It is important to recognize that the design consultant’s client is frequently not the end user nor the owner of the project. This condition occurs with design-build project delivery, with fee-developer and build-to-suit projects, and with speculative projects where the ultimate purchaser or occupant is not known at the time of project design. A consultant’s primary obligation will always be to serve client interests, even though these will be distinctly different than the interests of other project stakeholders. These disparities will occur precisely because each party will have a unique exit strategy.

For land development projects, clients and consultants should discuss the client’s project-specific business model, occupancy or marketing intentions, quality requirements, and durability expectations. These factors will be lenses through which design decisions are viewed, allowing the consultant to make decisions consistent with the client’s anticipated method and timing of investment return.