Sharing risks and chances

With an innovative development model, SüdBau Project Development and Construction Consultancy GmbH currently develops new perspectives for the real estate sector. The company, an enterprise of the partners Drees & Sommer, the Federal State Bank of Baden Wuertemberg and the insurance fund SV Versicherungen, strikes a new path of cooperation between investor and full-service provider. SüdBau focuses on cooperation in partnership, thus sharing risks and chances. The new construction "Alleehaus" in Karlsruhe will be pilot project and start on 1st April 2003.

The area, owned by SV Versicherungen (SV), has an overall size of 2.000 square metres and is exquisitely located next to the Karlsruhe pedestrian zone and the palace gardens. Hitherto, the premises were used merely as parking space - not at all giving justice to its urban and economic potential.

SV Versicherungen recognised the potential of the premises between the streets Kaiserstraße, Hirschstraße and Stephanienstraße. The institution commissioned SüdBau to effect a detailed feasibility study for a new construction next to the existing SV building. A property evaluation, which, next to location, also considers the situation of the property market in the area as well as operating costs to be expected, should ease the decision of SV Versicherungen about possible developments.

In the study, SüdBau confirmed the positive evaluation both the Karlsruhe property market and the site. Furthermore, the concept facilitates economic realisation and cost-effective building operation such as natural ventilation of the office space and use of the heat storage capacities of the unpanelled concrete ceilings for heat insulation in summer. Partitioning the space into relatively small, extendable office units additionally warrants an optimal utilisation of the space as well as flexible letting.

Convincing by risk sharing
For the actual project start however, SV Versicherungen required mortgageable guarantees in terms of costs as well as profits. 
In order to set the project into motion, SüdBau recommended utilising its innovative development model of full-service development including planning, execution, lease and "risk sharing".

SüdBau thus offered SV Versicherungen a system of a partnership sharing risks and changes in project realisation. The remuneration model in the concept is as follows: if 100 per cent of the calculated costs and profits are produced, SüdBau, as full-service provider, will receive 100 per cent of the agreed remuneration. If agreed costs and profits are exceeded or fall short of expectations, profits and costs will be shared equally between SV Versicherungen and SüdBau.

The concept, in principle, is based on the agreement of target yields as measurement for success. This is based on the so-called method of actuarial return - a dynamic consideration of cash flows over a period of 20 years and under consideration of various parameters, such as a leeway for lease increase, an option for turnover tax, etc.

Targeted tender sums are determined on basis of targeted overall costs, which, in turn, include profits and agreed RoE targets. To effect this, marketing and related costs in terms of construction as well as a sum for unanticipated expenditures is subtracted - targeted construction costs are thus identified.

In the project "Alleehaus", SüdBau compared the so-calculated targeted tender sums with its own experience and already obtained tenders. All values were within the calculated scope. In late 2002, decision-makers of SV Versicherungen decided on the grounds of the basic data: authorised go-ahead for the SüdBau using the full-service model to effect ready-to-use construction. As full-service developer, the company is now responsible for planning, construction and marketing of the "Alleehaus".

Playing with open cards
For those responsible, the decision was eased - the foundation for a trusting cooperation and the sharing of risks and chances in partnership was already laid in previous projects. The first cooperation between SüdBau and SV Versicherungen - the restoration of the Kronen Carré, the former headquarters of SV Versicherungen in Stuttgart - proved a stroke of luck for all involved. "Playing with open cards" is thus relatively easy for SüdBau as well as SV Versicherungen. Nevertheless, the project "Alleehaus" has all the characteristics of a pilot project.
Generally, SüdBau management is positive about the development model in partnership - whether in cooperation with banks, insurances, project developers or private investors. The hangover feeling at the stock market, generally low interest levels and momentarily advantageous construction prices make good real estate seem more interesting than ever to many investors. Individual solutions offered by SüdBau add maximum security to investments in real estate projects.

Full-service solutions
In order to continue to increase competence in partnership cooperation, SüdBau places importance on strong partners in the most diverse sectors.  The company profits from its associates, who contribute not only funds but also extensive know-how. If necessary, the associate Federal State Bank Baden-Wuertemberg and its subsidiary Südleasing are able to supply custom-made finance concepts. SV Versicherungen contributes the experience of an institutional investor with a constantly increasing property portfolio. But above all it is the Drees & Sommer Group, who supports public and private constructors and investors with professional services from the first idea of a project to realisation and operation thereof. When realising complex projects the all-in-one holistic management profile and consultation provide security and relief.

"Alleehaus" raring to go
The re-construction of the "Alleehaus" with SüdBau and the Drees & Sommer Group in any case leaves SV Versicherungen on the safe side. Practical planning has been concluded and commissioning of the executing company is imminent. Forecasted lease profits have been verified again by market and agent contacts, and the construction period has been defined. From 1st April 2003 to July 2004, the modern office building with a café on the ground floor and a total of 166 parking spaces will emerge - and chances are considerably outweighing the risks for all involved.

Author
Stefan Heselschwerdt, Managing Director of SüdBau and Drees & Sommer, Stuttgart in collaboration with Manfred Rupps, Managing Director of SüdBau and Manager of the Property and Construction Consultancy Division of the SV Versicherungen, Stuttgart.

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