good afternoon um I guess I'm gonna introduce myself I'm John mcnellis uh thank you very much for coming ladies and gentlemen to this presentation before we get started I'd like to show a hands how many of you are in the development business today a lot of you okay and how many of you would like to be in the development business okay I like to preach to the choir all right another note you know I have found in doing this that the best way to impart information is through a Q&A rather than me just lecture so anytime interrupt me just wave your hand uh and we will I'll repeat the question because this is being filmed we want to keep the obscenities kind of to a a low Roar but ask your questions in the middle of this some of the stuff is really obvious some of it might be a little trickier let's get started the first thing I think everybody in this room knows you've already figured out is that nobody starts as a developer it doesn't happen you know developers are like directors or uh sometimes corpses you're always starting out as something else you know even those who chose their parents exceedingly well and I know some people did still end up going working as a leasing agent or a property manager in their family's development company so how do you become a developer you go to work in a closely related field you work as a banker an architect uh contractor it doesn't really matter uh developers come from all kinds of walks of life please note that five years and that I'm going to return to that and you throughout the course of this I'll give you just some illustrations on how I came to be here today I started out uh as a lawyer when I was in law school I probably thought a developer was somebody who work to Kodak you know I mean never heard of it but I by as luck would have it I went to work for a transaction firm in San Francisco we had a pretty good developer practice there are more seats please come in and sit down you'll make me nervous standing there in the back uh we had a pretty good developer practice and I really wasn't a very good lawyer uh and in fact people wondered at how I I managed to survive at all but I lasted long enough to learn a little bit about the development business let's go back to that five years I use five years still more seats up in front because any job worth having takes five years to become any good at so even if you want to be a developer it's a good idea to work for at least the five years as as an architect or a banker or an engineer uh before you make that leap on the other side of that if you make that leap too late you're never going to be able to afford it it's almost axiomatic that you're going to starve as a developer on your own for the first three to five years and starving is a little bit less life-threatening if you don't have a big mortgage second car private school tuition so you got to make the jump fairly early it took me a while to get started I practiced law for six years um before I began any real development and for another three years after that during that quasi starvation period I continued to fill in blanks and contracts I was very fortunate that my partners in my law firm and I don't think this would happen today but my partners kind of thought it was cute that my hobby was making money so they they let me do it this may not be self-explanatory and actually it's worth stressing I think I spent the whole five or six years I was practicing law trying to impress my clients with how brilliant I was so they'd hire me you know even doing like Jedi Mind Control John we want to hire you as a partner it it just didn't work uh part of that had to do with me but part of that has to do with the fact there's still more seats up in front here with the fact that good small development firms are loathed to add overhead they try to Outsource everything I'll keep making that point very hard to get hired by a small development firm so options what does that leave you three basic options the first one is time honored that is you keep your day job and you continue to do little deals on the side this works all the time everywhere in the country you buy a fourplex you fix it up you double the rents you buy an aplex you fix it up and double the rents uh you put a 30-year mortgage on it and then you have four five six of these and in 30 years which unfortunately will go by like that you've got a nest egg you have a retirement uh and you're not a bad amateur developer the problem with that is a you're stuck with your boring day job still a few seats up in front and B it's just not that much fun uh one of my partners says uh we'll never buy a building where anybody sleeps uh the second alternative this is this works it's just really tricky that is for you to somehow find a great deal a big fat deal with a lot of profit in it let's say $5 million profit that you can take to a guy like me and say here is a wonderful deal sir and if you will do this deal and give me 10% of it and give me a job you know you can have it that works it's just really hard to find in fact any of you has a great deal where I can make $5 million come see me after the show and we'll talk about hiring you okay but third and what we're here to talk talk about today is starting your own firm let's see yeah and when you start your own firm you still need a kickoff deal you you need a deal to get started with a firm but it doesn't have to be a monster home run it doesn't have to have a $10 million profit it just needs to tide you over so what happened with us after I gave up finally waiting for someone to recognize how brilliant I was I went to that was a long wait I I went to work with an ex-client a guy who was a very accomplished developer he knew the nuts and bolts all the stuff I didn't know as a lawyer he knew how parking laid out he knew where trash ought to go he he knew all the stuff because I'm a retail developer that's just absolutely critical uh neither of us had a dime this is uh 1982 so 30 odd years ago he had a shopping center site tied up in the wine country in Hillsburg California traditional little barbell Supermarket uh Drug Center and I said gee I think I can raise the equity a million dollars uh door too selling it at $25,000 a pop and I have to tell you that it's like you're an actor in the worst broad Off Broadway play ever when you're trying to sell uh a shopping center investment in a shopping center to sell it 40 times you need to make a hundred presentations and you just go sick listening to yourself make the same pitch over and over again uh but we did succeed with that and we still own it today 30 years later and we're about to pay off the mortgage so starting your own firm you need a deal and here's the kind of Quasi bad news it can't just be any deal it has to be a winner it your first deal has to be a winner and this isn't as easy as it sounds uh this morning in council at a session the very first Speaker got up and talked this is is a woman who with a very large established East Coast firm she got up and talked about how a deal she thought was a home run she lost $15 million on it uh you know and that happens every day sooner or later if you do real estate deals folks and you most of you know this you're going to lose money but if you're going to start a development company that can't be your first deal or your second deal or your third deal you below that first deal your family your friends are still going to love you and they're still going to trust you but they're going to think you're not lucky and they're not going to invest with you anymore okay just to that's funny how that jumps up just by way of illustration there we go my personal Hall of shame we call it we've done 60 65 projects over the last 30 years that's a couple of year we're really not all that ambitious uh well we haven't had to add new Wing to the hall recently we did have three Flatout money losers one deal which probably would have been a loser if we didn't count for the tax benefits and frankly you shouldn't count for the tax benefits uh and then several just break even uh when we were doing institutional JV deals where uh we worked for free for a couple years but had any of these been our first three Deals I wouldn't be here today I'd be the guy down at the supermarket okay paying out of state checks you know it's just you got to succeed on your first few deals the good news though is that investing in real estate is a lot like uh swimming with a school of piranha your investors are going to be happy just to get out ho you don't have to make if you say gee I got my money back that's a home run this is worth spending a minute on um from our standpoint we have been there's still a few more seats guys in the front uh we have been very consistent for the last 20 years developing pretty much nothing but 50 to 100 150,000 foot neighborhood shopping centers and that's like5 to5 million in cost uh one reason we do that and I'll stress this later is that we're competitive another reason is because sooner or later you're going to lose money if every deal you do is more or less the the same price more or less the same potential profit range then that eighth or ninth deal is not going to take you down if on the other hand and this is a a pandemic illness in the development Community if every deal you do is larger than the preceding deal sooner or later you are going to be the richest developer in the whole world or you're going to go broke or you might be the richest developer in the whole world and then go broke oops let's come back to this one how many of you have heard of Olympia in York show a hands just I'm blind a little bit higher okay maybe 10% of you 30 years ago Olympia New York was the biggest office developer in the country they were everywhere they were the most the rikman family out of Toronto the rikman brothers they were the best developers they built the finest projects they built the uh the World Financial Center in New York City 30 years ago those guys were worth 10 billion which today you know is maybe 30 billion 10 billion still a lot of money three years later they developed the canary Warf everybody know the canary WARF in London fabulous project now not so fabulous when it opened they developed it into the heart of the the prior Great Recession the one that started in 1991 they were totally overextended ended they lost everything everything Paul wrightman just died and Paul was the the uh leader of the Three Brothers New York Times called it what did they call it the most astonishing Financial collapse in history they went from 10 billion they lost 99% of their money just because each deal was larger than the next uh now they did come back a little ways but they were never the same after that all right so you you want to think Goldilocks um Size Matters the other way so let's say you're successful and doesn't matter what you do you build Office Buildings industrial buildings and let's say your your range is five million bucks or 10 million or 20 million and let's let's just say you're doing $10 million deals and you're cranking out one of those every year and then one of your college buddies says hey here's a Surefire little million dollar deal don't do it and the guy says it's a home run the problem with that deal is you're not going to pay attention to it it's like oh yeah a little deal uh so then what happens is you don't sit on top of your architect and he or she will overdesign the hell out of it uh it'll cost too much uh you don't yell at your contractor he'll get loose with his numbers you don't sit on your leasing team they don't get it leased up and you know and I have made this mistake I have given this talk before given the same advice and have ignored the same advice to my detriment I just did a little deal that we shouldn't have done because I was bored don't do little deals all right what's a good deal it's hard to say there was the Supreme Court case uh Yak Cabellas versus Ohio in which one of the most famous Supreme Court Justices Harry Potter Stewart not Harry Potter Potter Stewart said that he couldn't Define pornography but he knew it when he saw it same thing with deals you know absolutely same thing uh this is a 7-Eleven napkin uh and we like to say and this isn't new with us that if a deal doesn't work on the back of a napkin on the first day you know when you're sitting upstairs having a coffee if there is not a clear obvious upside to the deal immediately it's not going to work all you can have Argus spreadsheets from here to there irr runs uh all the way to the lake and it's not going to make that deal work and if you walk away with one little take-home point today I think you got your money's worth don't push deals you know if it doesn't work on a napkin it doesn't work okay let's say you found a little deal that's going to work fine you found an office building uh let's say it cost $2 million and you're going to put a million into it and uh leasing commissions rehab and everything else so you're going to be in in it for three and it's going to be worth $4 million so it's a sweet little deal now you need to get money my next advice is don't worry about money this is it's up there deals are hard money is easy you you know what investors are getting I think you all know this investors right now are getting on their money you put your thumb and your forefinger together that's what they're getting you know uh there's a absolute ocean of money chasing good deals you can if you find a good deal you can raise the money are we all right let's talk about typical deals all right there there are an infinite number of ways to do deals uh we're gonna this is where we're talking about the money infinite number of ways to to split the deals but you know everything boils down in life to one or two things this one boils down to to two kinds of money friends and family money sometimes called Country Club money and institutional money and a small developer uh starting out is almost invariably going to go the friends and family route may not be his family uh but they'll certainly be his friends you know they may be the family of his freshman roommate and these deals haven't changed since Ramsay's joint venture the the pyramids uh the developer gets a small modest fee the money gets a preferred return accumulative preferred return and that's usually tied somewhat to where current treasury rates are or passbook interest rates usually between five and 10% and then the rest of the cash flow gets split 5050 and the sale and refinance proceeds get split 5050 that is the basic Country Club deal it hasn't changed an inch in the the years I've been in the business the split by the way is for a full-blown development deal a serious development deal a groundup development deal or an absolute 100% renovation or 100% lease up this isn't a deal where you see oh gee this building's 80% leased if I just plant some petunia and paint the building we can get it 20% at least that might be a good deal but your financial partner isn't going to give you half the deal you're probably looking at 10 or 15% uh there's not enough risk in the deal to Warrant a 50-50 deal the more expensive way to go is with institutional money companies that specialize in uh providing developers with Equity typically command an irr anybody in this room doesn't know what an irr is it's it's okay I don't it's you all got it okay they typically command irrs of 15 to 20% very expensive before the um developer sees any real profit so the money is much more expensive but the benefits to institutional money are um well they're really pretty simple one there's an ocean of it and even if you're a Rockefeller uh sooner or later you're going to run out of friends and family with money you just it's too hard to keep that model going if you really want to ramp up your business so the natural progression you start out with with your friends and family you get three or four or five deals going you get a little bit bigger and then you are come to the attention of the institutional money guys there is an Institutional money gu sitting at George would you stand up [Laughter] please okay here here's an advertisement for Uli George and I met 25 years ago at this meeting in New York City this is George Marcus he's one of the most successful uh Finance years real estate guys in the country he just launched uh Marcus and millichap public he has Essex Property Trust he is in the business of providing young developers with Equity so uh as you'll see I'm going to kind of call him the Antichrist as we kind of go through this but if you want to talk to an Institutional guy about money George is right here and he's willing to take your cards but that is one of the great benefits of Uli you get to meet some remarkable people over the years and the friendships are are absolutely fabulous I I cannot as as a sideline recommend UI too highly okay the other benefit back to that terrible Off Broadway play the other benefit to institutional money is it's a One-Stop shop you make one sale you raise just the million dollars one time and you're done okay oh yeah here's the not so good news even with the world's most honest best intentioned partner uh whether it's a financial partner or looked at the other way an operating partner your interest may be the same on day one and let's say your interest and your lenders interest are long-term hold uh low debt you just want to maximize cash flow you think it's a brilliant asset and you want to keep it forever and that's how the lender feels on day one it could be that's how the lender is going to feel on day five hell it could happen for 10 years but it's just as likely the some is is going to have uh what what are the four DS divorce death partner is often as not going to need to sell going to need to break up to this wonderful partnership and as often as not it's at the wrong moment the worst possible moment uh your 90% leas you all know that in almost every deal all the money is in the last 10% so you're almost there and your partner comes along and says gee I'm sorry uh I got I'm getting a divorce I gotta sell and guess what I'll get all my money back and my preferred return and you get a bottle of champagne you know that happens and what can you do about that really not much every joint venture agreement that I've seen gives the money partner the right to Major decisions and that's really frankly how it should be now on that point you were still better off with family and friends than institutions because the institutional guys they get divorced and uh and die too but they also get fired they get laid off they get transferred uh there's a corporate decision from on high that oh okay we we don't like California anymore California's overpriced or we don't like Boston uh and suddenly your deal that that you've worked so hard for uh has to be sold at a time that you don't want it sold is there a solution to this yeah well one is you don't do deals two you get extremely lucky with your partners or what we ultimately evolve to you it's the three steps in this from family and friends to uh institutions to um well we'll come to that in a second what did I do so the first three or four deals we did with family and friends like the ex partners of my old Law Firm uh they fortunately those deals went well so I kept everybody's attention uh but soon enough you know I ran out of friends with money uh I went to public school so it did that run didn't last all that long we moved on to institutional Partners in the early 80s uh students of real estate might recall that was the the go-o SNL days in the early 80s so 30 years ago I literally was doing deals larger than you know inflation adjusted than we've ever done sense we were using 100% of the Savings and Loans money they were kind of throwing it at us I had an older partner who uh I thought he knew better I I didn't know what the hell I was doing uh and these were big projects very impressive to drive by you know I tell my friends at the gym hey yeah that's my project wow John cool by the crash in 91 they all went away now it was our fault but it didn't help that one of those Savings and Loans actually just went out of business another one with a little more money just said we are exiting the uh real estate business tough you know we're selling everything and the third uh they we were all set to reconstruct a 300,000 Foot Center a big project all the leases are signed the last uh institutional partner says to us we're out of money uh we're walking and we said well wait a second it says here in our joint venture agreement you're going to fund $6 million and they said well you read that a little more closely and I'm sure it's hasn't changed to today no Financial partner ever has a recourse obligation to fund to you what happens is if they want to take a walk you know they hear the keys good luck and that's what happened to us on that deal so by about 1990 I had an epiphany a financial Epiphany kind of saw on the on the road to Wall Street which which was it's better to own a 100% of a million dollar deal you know a crappy Corner Gas Station than 5% of a $20 million deal you know mid-rise office building or 1% of a high-rise I mean the mass the same the numbers are the same but you get to control your own destiny with that gas station no guy in New York can call you and say you know we're selling sorry dude uh get out and you only have to wear a suit you know on Halloween or or when you or when you come to Uli true so we went from it's a little counterintuitive we went from doing $20 million deals you know when I'm 30 years old and didn't know what the hell I was doing uh 10 years later down to one and two million deals uh but using our own money H carefully using our own money and then doing deals by buying selling and mostly with the uh the good luck of the the 1031 exchange questions thus far okay we'll keep rolling here's another Revelation oops let's see wait a second yeah so that was it no Partners no problems you there's a lot of guys in this building that don't like to hear that because they're in the business of being your financial partner but uh so since 1990 we know Financial Partners every deal we've done they're smaller but but we own them now your best financial partner is your Banker absolutely your best financial partner is your Banker why because I guarantee that most of you if you're going to do family and friends deals you know you put your mother in the deal you put your secretary's sick aunt in the deal the the documents are going to be non-recourse they're going to say you you can walk away anytime you want but you're going to feel morally recourse you're going to say holy crap I can't lose my friend's money you know and your friends are going to tell you that too they're gonna say gee I never read the contract you told me I'd make money so if you're going to feel like you have to pay the money back anyway go to the bank on a successful deal no matter how much interest rate uh how much interest the bank charges you it's way cheaper than giving up half the deal you know they say 7% 8% 10% who cares if you can keep the whole deal the other good part about uh Bankers especially those that are here I mean you got some really smart real estate Bankers here is they are good partners because they understand the business it's not like talking to your mom and saying G can I borrow 25,000 the bank will say are you crazy that is a terrible deal so they're a good sounding board okay so now in our Odyssey here you've got your first deal or two and you've got your family and friends money and now it's time to start a company and one of the first things you're going to decide you're running the company is am I going to take in employees am I going to own everything myself or am I going to do Partners there's no right answer to this we have chosen the partner route I think most of the successful firms that I know are one way or another Partnerships I've been together with my two principal partners for the Whole 30 years one of them runs all the properties and the construction the other one runs a company and it kind of leaves the question what the hell is it that I do but uh we've been together a long time and E all the employees are uh in our profit sharing and I have some of the highest paid property managers uh in the state as a result of that somebody once said that a one-word key to success is overtip and that Charmed me it was actually it was Michael Corda said it about his father Alexander Corda over tip and that that kind of generosity is a great way to run a business your Serv for a small company your service providers are absolutely key and I'm talking about the Brokers the bankers the The Architects the engineers everybody you deal with you want them on your side you want them like today um we heard this morning you may have heard construction is going crazy in a lot of places it's very hard to get contractors to pay attention it's hard to get subs well the way you do that is you take really good care of them you pay their bills on receipt if you question the bill you question it politely uh and and if you don't like the answer then you still pay the bill then you just don't work with that person anymore uh speaking as an old lawyer having someone question a bill it's kind of like accusing you of uh fraud it's you have to be careful about that and then you just take care of your service providers you take them to lunch you take them to drinks uh and it's kind of counterintuitive you say wait a second I'm the big cheese here they should be taking me but no it doesn't work that way oops did I Skip One yep no all right this slide has three good little basic points to it you want to choose a service provider who and let's pick lawyers it doesn't matter could be an engineer the most experienced person that you can possibly afford who will actually do the work so experienced you can afford does the work you don't want to go to the name partner of a fancy Chicago Law Firm who is going to pull out his Best China you know interview you and say no here's my junior partner and then as soon as you leave the junior partner is going to lateral it off to the 15-year-old associate so you're going to get three levels of Legal Services you're going to have a huge bill and you're not going to get that kind of quality what you want is you know you look them in the eye you're going to do the work yes best way to do that is go with a small firm and it's same with the engineers same with the architects you need two people you know are on vacation they get sick uh people respond a lot better if they think there's some competition so having you know two lawyers two architects and so on and having them know about each you it's like an open marriage you have them know about each other just so you keep them on their toes gee you don't have time to bid this job well you know Charlie does okay audience part participation time who's your most important service provider and any guy or woman who's bound to become a developer knows this already some I I want some shout outs on this accountant no your spouse what is your wife here no you don't need to suck up to your spouse here no not your spouse ATT attorney no who said broker stand up Take a Bow I'm serious it's your broker absolutely your broker is your most important service provider what did I tell you deals are hard you what do you think the chances are that you're going to go out and find great deals on your own I I'll tell you that they're really really Slim what you need are good Brokers honest guys who are hardworking and you need to take care of those guys how do you do that the first thing you do is you avoid the mistake that every Junior developer does which he runs out and gets a brokerage license right and he says gee you know it's a $100,000 commission if I act as the procuring broker I'll I'll make $50,000 and family and friends won't care about that don't do that that is so shortsighted you might get one deal like that but then every other broker in your community is going to say screw them you know you're not going to see any deals don't fall into that trap be loyal to your Brokers make sure they get paid it will pay off in the long run there's your answer okay give up the broker's license oh seeking out the yes sir uh the question was how many Brokers do we like to work with uh uh I would say as many as possible effectively we work with about five or six uh in different different areas okay ah seeking out the listing broker you know to me you know it's like it's like in all these uh mystery movies you you follow the money if you just follow the money you know I don't mean to be cynical here but a broker that's going to get a full commission is going to love you twice as much as a broker who's going to get a half commission so if you can seek out you drive by a building and you see a for sale sign or a land with a for sale sign on it and this can be a little tricky because the guy who answers the phone doesn't want to tell you he's not the listing agent you want to be kind of hone in there and say who is the actual listing agent and they said well you know I'm working with him you said no don't give me that who's the listing agent that's the guy you want to talk to because then you're dealing with him he's getting 100% of the commission and you have suddenly gone to the top of his list of potential buyers you know I'm sure everybody's fair and honest but if there there are 10 buyers at the same price and the listing seller has only one where he's getting a full commission who do you think that the listing agent is going to talk to about the seller or to the seller about human nature um here's some kind of bad news actually as far as I know it's impossible to make any real money without taking any real risk Sellers and I'm I think you all know this they won't let you tie up their property uh for very long at all for free 30 days 60 days any tenant really worth having uh can't get out of their own shadow in six months I mean it takes forever you know to get leases done and most of the money for developers is actually made in the public arena in uh rezoning in obtaining permits lot splits or whatever and that takes a long time so you're going to need need to kind of get past this idea of I got to tie something up for free until I get all of the the pieces put together excuse me that's very very hard to do and if you know the the Red Sea parted if there was some miracle that allowed you to do that so you actually had 100% of your leases signed and you had a building permit well then what would happen is youd take it to your financial guy and you'd say oh yeah that's nice John but you're not taking any risk here so we'll take 90% of the deal so you pay for it one way or another now laying off risk like I said you have to take risk but there's no reason to be silly about it you try to lay off as many as you can uh we have and it's worked out okay for us uh we have tended to make our mistakes on the the cautious side um and one of the things we we do not take interest rate risk we lock up kind of think of ourselves as Farmers so whether it's a drought uh financially speaking or a deluge as soon as a property is ready to be placed in service that is as soon as it's 100% leased we put the permanent loan on or we sell the property we don't float debt you know we're not an investment Bank uh and we think that if on the day that the property is ready to be put in service if it makes money at whatever the interest rate is that's good enough there are a lot of people who've made a lot more money this particular the last 10 or 12 years floating and staying down you know interest rates have stayed down and down and down but uh like the song goes they say it'll kill you but they won't say when sooner or later interest rates it could be five 10 years are going to kill you so we just lock up everything we can the other thing we always try to do is lay off as much construction risk as we can again this morning we heard that uh supplies are in short supp Texas I guess has a horrible problem with uh construction workers you can't find guys to lay sheetrock prices are going up wherever we can we say we'll do a scope of work we'll say okay you want to have a plain vanilla shell uh remember we're in retail and we say it's 25 bucks a foot uh tell you what we'll give you 30 bucks a foot you take the space as is you build it out there we that way it it's just exactly the way you want and most of the time B end up spending 40 50 60 we have monetized our risk and and we're done with it I try to do that on every single deal on larger deals let's say we're doing a deal with Walmart or Safeway or a bigger deal we will try always to do a ground lace as opposed to a builda suit now I'm sure a lot of you know that ground laes are economically not as attractive uh from a yield standpoint as a builda suit because in a builda suit you're getting a yield on the construction C dollars that you put in but they are much safer if you do a build a suit for a tenant um Fresh and Easy is a supermarket chain that just went bankrupt on the west coast if you had done a builda suit for them you were totally screwed if you had done a ground lease for them then and they built the building then the you're either way you're getting the building back but the rent structure is much lower much easier to replace so we try to do ground leases um we'll talk about guarantees in a second here's another idea if you're starting out as a as a developer don't go with your college buddy who's starting out as a contractor uh a sad way for a developer to go broke is to have the contractor go BK in the middle of your project so go to a guy with gray hair and is's wearing a suit who's going to charge you and your your buddy will say Gee's charging you 10% more than I would and just say yeah that's okay that's insurance I know I'm going to get my building build [Music] guarantees you I think I hear this every single time I come to Uli somebody gets up and says I never sign guarantees I heard it this morning never ever sign guarantees never ever sign guarantees they're a bunch of liars people sign guarantees uh and you guys if you're going to start out are going to have to uh it's extremely hard let's just say impossible for a young developer uh to avoid signing guarantees let's kind of run through the scenarios permanent loans you can get away without sending a guarantee the um permanent loans have the they're called Bad Boy carve outs as I'm sure most most of you know and they run 20 pages long so it's as close to being a guarantee as you can get without being one but they are technically not non recourse uh even a brand new developer can get a permanent loan non- recourse Partnerships you know putting aside that moral or ethical recourse that I talked about Partnerships that's the benefit of equity uh they're non-recourse you don't owe the money back to your investors uh so that's easy lines of credit which we find very useful in our business those tend to be secured or secured by so much real estate you know let's say you want to borrow 10 million on line of credit the bank will probably want uh 20 25 million worth of property to secure that line so and short of that they're going to want your signature uh construction loans construction completion guarantees these are guaranteed by almost everybody unless you're in the absolute highest ranks of development and that they're signed uh by the the the companies that have you know uh investment grade credits our approach yeah I sign you know it's like AA yeah I'm a developer I sign guarantees we sign guarantees on on a selective basis um but we do so because our deals are really really cautious I I think we're kind of like more cautious than a crosswalk guard you know when it comes to our deals let's say we're doing a $10 million deal we'll put 4 million of our own money into it uh so we'll be looking for six million and we probably won't build unless we are uh pre-lease to at least Break Even or darn close so our way of thinking about it is look we're not going to walk away from four million so I don't mind guaranteeing the lender on the six on the other hand if you and again this morning someone was talking about a a highflying structure if you the the developer have you're putting up 5% of the equity piece the equity piece is 20% and then then there's a mezzanine piece and maybe a second mortgage and then a first so you got a capital stack that looks like the Tower of Babylon you don't want to sign a guarantee there uh but they're often trying to get you to do that I would stay away from that questions yes sir so the question if I get the question it was how do I hang on to a deal when I don't have the experience to get it through to the end well I I don't the question was if you don't have a development track record on that first deal then how do you avoid getting diluted down by your investors they're going to say hey shouldn't we kind of Mark the market here you don't have the experience there's a higher risk profile I think the answer is uh that you are going to get diluted down you can what I did I my partner was 15 years older so when I was 30 he was 45 he actually had enough gray hair and so I couldn't sell myself building A1 million doll shopping center which like that crazy but I could sell this guy uh and so but he got half the deal you know to your point now you could bring in a partner you could find someone who with enough of a track record uh but query whether that's better than just going to the financial guys and saying look this isn't rocket science I can get this done you know I know it's my first deal so rather than 5050 you know let's do it 7030 make sense um uh second Deeds of trust back to that Capital stack you know that the holders of first mortgages I don't think there's any second lenders here in this whole Uli you never meet them but you have all these classy lenders here near know the big life companies and no matter what they tell you they they they may huff and puff but they're nice guys they never go after guarantees on a first mortgage they just don't do it that you may sign one but your risk there you won't sleep at night for a while but they're not going to go after you totally different story with second mortgages they're in the business of killing people you know they're in the business of loan to own uh and then they're in the business of filing lawsuits don't don't don't sign personally signed second mortgages that I would say is a absolute must how we doing on time oh two o'clock not bad okay I think I've said this but it's worth stressing you know we believe in Outsourcing everything you know and what but we also we Outsource but at the same time it's like they're in we we'll throw a party you know architects come you know our Brokers our Bankers come we save a ton of time on all of these contracts I cannot tell you the last time I looked at a service provider contract someone hands me a Construction contract and we've used two contractors now for 20 years all I look at is okay the address is right the gross amounts right you know what's the line for overhead and profit all that other stuff we don't look at so we save a lot of time that way and I think that's really useful ah this is one of my um pet issues I I think everybody in the world everybody deludes him or herself about something you know it's crazy you know people think I can run fast I can carry a tune and my mother thought that she could actually cook it was uh developers often think they developers try to you know live on their charm they often think they are a lot more Charming than they actually are uh but the those are all kind of relatively harmless ways to delude yourself the one thing you cannot delude yourself about as a developer especially if you're using your own money as numbers you know you go back to that back of the napkin and I've seen this happen over and again so the little napkin return looks thin so the developer says yeah Market rent maybe two bucks a foot but my little building we're going to have a reflecting pond in front or or you know it's going to have a green roof on it so therefore we can we can just bump that to two and a quarter in our projections that is there are like multiple roads to to ruin and that's that's one of them or you go the other way and you say gee I know expenses cost five bucks a foot here but I think with our Superior management skills you know we can manage it at $4 do a foot no you can't the building's going to fall down don't lie about numbers um this is uh not all that useful for somebody starting out but our best deals over the years actually over the last say 10 years have been joint ventures uh and those are actual uh formal joint ventures but more often than not they're de facto joint ventures Walmart says to us hey John you know that little town stocked and we want to go there and then I'll say hey how about this corner yeah they say that looks pretty good and that's how it it's worked really well for us that's a result of the same thing I'm talking about of nurturing long-term relationships and friendships uh the only hard part but it takes about 20 years to get that going it looks easy after that few more tips I'm G to these are all self-explanatory I'm just going to emphasize again that uh the most important one specialize I think those of you who are new to Uli uh you probably have it figured out almost already and those of you who've been here for a while know it everybody in this business is highly specialized all we build are neighborhood Supermarket anchored shopping centers 50 to 150,000 feet so we are highly highly uh concentrated in product type the other thing they're all within a two-hour dve Drive of say paloalto or San Francisco so we highly specialized geographically in that little niche we can compete pretty well uh we cannot compete with h biggest competitor in my world is Regency centers you know they're National we cannot compete with them somewhere else uh we have a shot up against them in our backyard in our product type okay finishing strong this is my last slide and then we're going to open up to questions comments and George will be taking uh loan applications once you have your firm you know well on the way uh and I'm sure a lot of you are going to it's it's not that hard start giving something back and and not just you know money but your time you know every every one of you everyone in this room is is far luckier than 99% of the people on the planet and and if you want to thank God or or Darwin or whomever you know for your great Good Fortune the best way to do that uh is to give back to those who weren't dealt the same set of cards that ladies and gentlemen concludes my remarks I am more than happy to answer any questions yes sir s okay the question uh or more of an observation was that uh this gentleman has uh got his firm going he's into it for three years he's doing deals in the one1 to3 million do range uh and trying to find an Institutional partner uh in that range and so far I think you're talking to the wrong people there are people people out there George Marcus go see him who want to [Music] do yeah that's a good point so it's hard but you can get there the other good part about that uh is that the range that I've been working in the call it the five to15 million range is where it's most inefficient you know above a few million the little guys can't compete and below 20 million the big the institutional who are here you know if if you're a an acquisition guy for some big company they give you 250 million 500 million and say go put this money out this year they don't fool around with deals that are $1 million so so you know when I was a kid I thought geee once I get up to a certain size then I'll start getting a really great deal that's not true the deals actually get worse the returns get worse above2 million next question yes sir in the back having so you're asking is it a good I think that gets tricky uh the question was is it a good idea to have one of your design professionals be your partner it certainly Works uh but that can be a little tricky if you're unhappy with the design uh I would prefer to to not do that you know life's already too complicated and what you're trying to do is avoid uh potentials for conflicts of interest but if you're starting out and he says gee you know my fee will be 200,000 but I I'll do it for part of the deal if you make them a limited uh so they have no control otherwise yeah sure yeah you could do that we have taken brokers in uh in the early days for their fees as limited partners that that works more questions yes sir uh yeah we're in the fortune position the question was do we get second loans from our banker and uh we're in the fortune position of we don't don't need seconds we just the way we do it um we buy properties off our line of credit uh PR fairly substantial line of credit so uh the beauty of a line of credit is you don't have to go to the bank and explain to them what you're doing with the money uh because they always you know you said you're going to buy that so you just buy it off the line uh and then we redevelop it and then we decide whether if we're going to keep it then we go put a permanent loan on or if we're going to sell it then we sell it and pay back the line but uh second mortgages I they're they're necessary but they're they're tough and they make life a lot tougher when it goes if something goes wrong so as soon as you can get away from second mortgages uh I would recommend it yes sir yeah we use our line of credit so over the years we've managed to accumulate a certain number of properties that are free and clear so we have these as our pool so we put them up with in our our B Wells Fargo brilliant bank Wells is our principal lender so we'll go let's say it's it's X dollars on the line but we'll pull five million off that line to buy a $5 million shopping center then we'll pull another M million or two off of it to redevelop it and then at the end of the day say two years later when it's ready then we'll either sell it and then pay back the 7 million on the line and then keep the proceeds or we'll put a loan on it and pay back the line that way follow yeah yes yes a stute question this he said with that strategy doesn't that limit the number of deals you can do absolutely uh I think I said 30 odd years 65 deals we've averaged a couple deals a year you know I'm just not that ambitious uh you know and I I just saw this know he who dies with the most toys still dies you know so you know it doesn't matter uh so I love doing deals they're fun uh but you know I'm not working off some chart and you know my company I think we've added one person in the last 10 years so we kind of live by this keeping it small and Outsourcing everything and I don't need to do a 100 deals ma'am in the back yes so is the question if it's a property that we have earmarked for sale uh the day it's ready to sell for some reason there's no buyer for it uh what we'd probably do there is is float it uh in other words just keep it on the line of credit until we could sell it we have found you know the whole thing about real estate being a liquid that's not really true it just most Sellers and you guys will will find this a thousand times in your career they just don't want to sell at what the market price is you know every single piece of property in America could be sold today at a certain price but you know that that's the beauty and the discipline of the stock market is you know to the second you know what your shares of stock are worth real estate you can lie to your back to you know diluting yourself you can say wow my building used to be worth 5 million so I'm sure it's worth 5 million today well no it's worth three and so then it's IL liquid but I I I think if you you want to move real estate you always can uh we've never really you know sometimes we've waited you know and to my regret I said Gee this property's going to go up in value whoops didn't happen yes sir that's the question was uh we do retail why do we choose that over office or industrial or or hotel or Mini Storage was pure fluke the older guy that was my partner he was a retail developer and actually I done a couple little deals on my own and Industrial and that didn't work out so I just fell into retail and I I love retail it's fun yes sir I'm sorry yeah I think that's a huge mistake because that you've got all this overhead right uh and then the beauty of our approach is uh it's like staying in a hotel versus having a second home so you're flush and and you're staying in the presidential suite well you hit a road bump you check out of the hotel that moment if you have a second home you're stuck with that second home if you have a construction Department I think what I what I was trying to say may didn't do a good job of it we try to in effect have in-house Architects in-house contractors but they're actually outside the beauty of our approach is the moment we don't have anything for them to do we don't have to pay them any money it is very very hard laying off people property management is is and we do all of our own property management that's a tough business a very small margin and you can lose Property Management any day of the week and then what happens is you've got five property managers who you like who are working for you and his mother needs a liver transplant and you need to lay off I mean that's the problem with the all those employees I don't like that approach yes sir yeah I'm sorry I didn't get that question yes right the question is knowing what I know now how would I I do it differently with if I were yeah I don't know that I can answer that you just have you know if if each generation uh didn't make the prior Generations mistakes you know we're we we're kind of all bound to just repeat the mistakes over and over again so I don't know that there's a great answer to to that um you know ultimately it didn't work out with that partner uh we learned from each other for a a few years and then we went separate ways but uh I don't have a good answer for that I'm sorry yes in the back yeah that's a good question and the question was how how do we handle Market timing and the answer is we don't uh you know C California and particularly Northern California and more particularly any town that you really want to develop in paloalto Santa Cruz it takes years and years so I kind of feel like we just have to to put our shoulder to the wheel and just push it through and we don't worry about Market timing so our deals can go through an up and a down another up and another down and we just want we just try to push them out just as soon as we can we don't worry too much about that yes okay this is a future developer yes um and that if you can you know you can go on our website melis.com if you want but that's on that Epiphany that I had and 1990 that was the other thing it is very very hard getting uh political approvals on um green uh oldfashioned Green Green Field development not green development you know the cities hate that you it's much easier to uh renovate and so for a while there in the early 90s not too many people were doing it we were buying old shopping centers and fixing them up and you know it's you go to a town that isn't in San Francisco or paloalto and you say we bought this old dog of a center and we want to put five million into it they give you a ticker tape parade they say oh that's great man you here's your permit so you eliminate the political risk uh so I love renovating buildings every time I would always rather uh and almost all of our projects have been that way we do very little uh edge of development Green Field development I try to stay away from that for that very reason that's good question more oh yes sir question is you know I mentioned that we prefer uh with our larger tenants doing ground leases as opposed to builda suit uh an astute question will all the tenants go along with that and the answer is no they won't uh some tenants well well actually let me back back up if you have the absolute corner of no and brainer you know that you know if you just have the in retail if you just have the the killer Corner uh let's say Union Square in San Francisco the tenant will do anything you want but if you have a a good Corner in a Cow Town the tenant will say no we will only buy like Target for example they'll tell you we will only buy uh walm Walmart will say we prefer to buy uh some tenants like Ross it it's nothing but build a soup we say well we don't care you know and and most tenants really really well-run tenants make far more in retail uh selling clothes or coffee or whatever it is than we make uh in real estate so a lot of them don't want to bother with real estate now McDonald's is is interesting because McDonald's is such a successful company and it's been around long enough that it has seen its operating costs go from you know 1 to 10 when the lease is renew so McDonald's is really insistent on buying but that said I'm working on a ground lease with them so it's it's not carved in stone more yes sir hey George you can help me on this one the the question if if I understand the corre question correctly it's the what what do the institutions want uh with an operating Party stand up you know all the institutional investors that they've been drinking since Tuesday here right you know they they talk it's basically like like they're Bakers you know they're selling bread they're all selling it pretty much you know it might be this might be pumper nickel this might be Rye but the pricing is pretty similar you know somebody might have a a a waterfall you know 8020 split to a certain level 7030 to another level 6040 to another level but you can it simplifies out that that they want to get that 15 to 20% return before you make any real money and we heard that again today this morning in our Council session yes sir that's an interesting question no no we just give it away you know I'm not afraid of that you know the question was but by by staying small and and and having outside service providers are are am I afraid that they'll take the knowledge that they make from us and go out and go into competition with us something like that yeah no the question was how small can the firm be uh and the a small development firm can be just you right you're the developer uh and and the next question was do you need an engineer to oversee the engineers no you just need to pick you need to investigate an engineer find one who's honest and competent and and well thought of in the community and trust him same thing with the architect gee I love the way that guy works works you find out he charges at a pretty reasonable rate you trust him I have a friend who's in the um uh he's in the the institutional he's in the business of buying global companies and he buys companies from uh Marine uh electronics to coal and Coke companies to airplane companies he buys all kinds of stuff and I asked him I said how is it you can possibly understand all these businesses and the guy said John I can't you know there's no way I'm going to understand this he saysi just pick people that I like and I know and I trust and that I don't understand engineering I don't understand architecture you don't have to you just have to work with good people and who get you good results more questions uh over yes sir and then I'll come back to you thanks I'm sorry I'm not quite sure what what your question is yeah yeah I think that's right but another way look at the answer is the question was do do you think the institutional investors are actually going to get that yield uh I in my personal experience when when I worked with them and now it's been you know more than 20 years they didn't and I didn't that's why when I said those kiss sister deals you know we didn't have any residual liability but but the meter was such you let's say it was a 14% meter we didn't hit that so when the sale came along the uh Financial partner got let's say a 10% return instead of a 14 and we got you know a handshake for the all of our effort so I just didn't like that and now you sir I think my experience is Wells Fargo has the smartest real estate Bankers uh what you'll find in your career is it gets very U almost distressing to go talk to a banker and explain something just the way we're talking today and they kind of glaze over and they don't get it uh and they don't get it and they're going to go to their Chief credit officer and he's not going to get it you're not going to get the loan Wells Fargo has I think the smartest bankers and they get our business so I only need to explain something once and they say okay yeah we we like that genre no you know that's not exactly you want 10 years we can only go seven we got a quick answer out of them I I can't recommend them enough no unfortunately I'm doing all this ass kissing for for no no good reason but Ju Just just tell them for me okay no yeah right okay the question was uh this young developer starts out with a local community bank I'm going to tell you something you guys probably already know that's where you start with a local bank but banks have something that's called a loan to one borrower Rule and it it's based on their capitalization so a little Bank uh the problem with a little bank is if you're successful you're going to blow past that loan to one borrower pretty darn quick you know their maximum total loans like you can have 10 loans but you can't Exceed 2 million 5 million 10 million so you need to make the jump from the little Bank up to the next level it takes quite a while to to get to the right people at a at a B OFA or Wells Fargo But ultimately if you're going to be a real estate developer you want to work your way up anybody but George oh three Banks yeah that's AB yeah I I included banks in fact I I I write a column for the registry magazine if you want to read it it's registry.com mcnellis but I I wrote a column on uh having an open relationship with your Banker you know just you know your Banker wants you to be monogamous you know they want all they say we want all your business this is a mistake because the bank will come in and out of the market the bank will will come in and out of pricing ideally you'd have three Banks you'd have that little bank that you start with and then you work up to like a larger Community Bank and then you finally work up to a national but the banks are always changing they're always merging so I actually I'd like another bank right now I've only got two uh but in the way way back yeah uh the question was can I elaborate on the fee structure in a a country club setting what are acceptable fees I think if you tell your your family and friends you want a 1% acquisition fee so it's a $5 million deal you you want $50,000 for acquisition no one's going to squawk too much about that if you say you want um 3% management fees and that's standard no one's going to squawk about that uh for construction management two to three% of hard cost that's pretty so you were going to put two million in it so 2% so it's a $40,000 management fee leasing commissions uh then if if I were your financial partner I'd say is that a good idea to have you doing the leasing or shouldn't I go over to someone who's an expert leasing agent so it's the financial guy is not going to be adverse to paying full leasing commissions but he may be adverse to paying them to you and he may be really adverse to have you skimming off that back to the point about pay Brokers as much as you can to get the best possible service he probably doesn't want you on on the leasing commission side and then you know so he gets the let's say it's a temp % preferred return it's a brilliant deal it's a 50/50 split it's a little bit piggy but I've seen family and friends where someone will put a 1% uh sale fee on on the back end too uh but I have found uh that the simpler if you're trying to sell Country Club money the best way to do it is to say look I'm not going to make a dime zero until you get your money back then the old guy says well okay gee you know if if you trust you that that's a pretty good deal or you say all I'm going to make is a management fee I'll make 30,000 a year and I'm going to kill myself for you Grandpa uh that that's pretty impressive if you start saying I'm gonna get this acquisition fee and this leasing fee and this fee the guy says wait a second this son of a will make 250,000 whether I get my money back or not much tougher sell so put yourself behind the money yes and The Way Way Back yeah sure if if you can if there's uh we just did just finished a mix use project where we put in very low income housing and as a result of that we uh were able to sell tax exempt bonds and and there were some tax credits we took advantage of that uh yeah I definitely would do that folks it is a little past 2:30 I am happy to stay to answer questions but you're also free to go I very much appreciate you're all staying here thank you okay
