Real Estate Development: No Partners, No Problem

[Music] I'm John McNellis with McNellis partners a little bit about our firm to start we've been in the retail development business that is neighborhood shopping centers what used to be called barbell shopping centers supermarket on one end shops in the middle drug store on the other we started that about 35 years ago we had no money and no experience and now we've got a little bit of one in a lifetime of another this afternoon I'm gonna be talking about a very specific part of the development business that is partners if you want to get a broader view of starting running and hopefully succeeding with a small development business you might take a look at this talk I gave a few years ago for the Uli it's on YouTube and there were a couple of follow-on talks one on buying property right the other and what I think is Real Estate's hardest decision what's that sell versus hold when you have a truly wonderful asset it's all in the book Uli kindly published this book making it in real estate I think it's available here for purchase if not if you can pick it up for 10 bucks on Amazon the reviews have been unfailingly kind I didn't have to pay Preston butcher all that much for this review anyway alright we're gonna talk about partners you can divide the world you know it's so many people do in so many different context and into two you can divide partners I think for developers into two that is operating partners on the one hand financial on the other operating partners are much easier proposition to deal with so let's talk about them first I suggest if you're starting out and some of you may be and some of you have been with me here at Uli forever but if you're starting out I suggest you do your very first deal all on your own you buy it you've financed it you you paid it you put in the petunias you manage it you do the accounting what this does for you is it enables you to get a pretty good sense of what your service provider do and you know if you stumble through it yourself you'll have a greater appreciation for them however you do that once or maybe twice and then if you have any ambition at all I think you've got to get away from that time does leverage better than money the moment you can afford to have somebody else get your loans paint your houses do your accounting you need to do that you know what your need to be able to do as a young developer is leverage your time you need to focus on your most valuable personal skill and if you were meant to be a developer what is that skill that's obvious it's finding sourcing and closing deals so the moment you can do it you move on to outside help now if you start out in the at the bottom of the mountain peak in the financial Valley if you start out at that bottom and you want to work your way to the financial peak I'm going to suggest that you consider a base camp of consultants that is you rent you hire consultants by the hour as long as you can as opposed to hiring full-time employees or certainly partners why well think about it if you're doing reasonably well and you're spending a hundred thousand a year on your your lawyer and she's earning two hundred thousand a year in her law firm unless you have a Napoleon complex you'd be crazy to hire her for twice as much money less intuitively though let's say you've moved on and you've got three hundred thousand year in legal fees and you could hire her for two hundred thousand even then because of the great advantage of consultants great advantage is that you can cap them any given day your deal blows up you let that consultant go that same day I suggest you that even the flinty is hardest hearted developer very seldom fires or lets go his employees on the very first day that he should you know on the day the deal blows up so rent but there will come a time if you're being successful when you need to move beyond consultants and question is how do I do it do I go with employees or partners and this isn't it as an obvious a choice as one might think employees if you think about it they're going to be a lot more expensive if you fail but no one's planning on failing of course or they'll be more expensive if you're just sort of middling ly successful if on the other hand it's the World Series today let's stick with a baseball metaphor if you on your deal you hit it 400 feet deep centerfield in Chavez Ravine and you've got partners and you think you could have done that without the partners those partners will have proven inordinately expensive so it's it's a tough call the thing I'll point out that you don't necessarily get better help through partners than employees key employees can be every bit as effective and efficient and oh by the way you know I've given this talk a little bit I have found that the best way for me to impart information is to do it in a question and answer period I know we're filming here but please if you have a question or a comment please feel for you to interrupt maybe I'll be able to see you so you should probably shout out anyway you don't necessarily get a better economic deal with partners but there's more to life than money properly viewed I think life's about the journey rather than how much is in your suitcase at the last stop so what did we do I've had my same two partners for 35 years Mike powers and Beth Walter if it weren't for them I think I'd be a night manager at some motel it's it's been absolutely great I think with partners you share the losses you share the joy you shoulder the work together it's just more fun and I will tell you that anecdotally and what I can observe from my uli colleagues a lot of them have done the same thing they have career-long partners all right financial partners a little bit more interesting case financial partners we all start with them if you're born rich your first financial partners your family if you're like the rest of us it's your friends but you have to start with one by necessity the question is do you stick with financial partners once you no longer need to benefits of long-term financial partners are so obvious they scarcely need to be commented on and I will say that I think the majority of the biggest best developers in the country have long-term financial partners deal flow so obvious that what can I tell you you can do more bigger better deals prestige particularly for your outside friends you know your friends that you see at the gym you say I'm working on this 300 million dollar project and I'm a partner much more impressive than saying you know I'm trying to rehab this corner coffee shop I think the one of the biggest things that isn't stressed enough and I do want to stress it on behalf of Financial Partners is the risk management typical deal I think most of you know it is the financial partner puts almost all the money up used to be a hundred percent now it might be closer to 90 percent and the developer puts up 10 the partnership the limited partnership agreement or general partnership agreement is non-recourse that is and there's a catch to this and someone asked me about this later in the Q&A you have no financial personal liability to the financial partner nor does she back to you in the other way so you can leverage your time you can get into a very large deal for a relatively small amount of money if I walk you through an example it's a little bit more obvious let's say you have a 10 million dollar project it doesn't matter what office building Hotel financially they're kind of fungible 4 million in equity 6 debt the developer puts up 10% that's 400,000 or 4% of the total costs the financial partner puts up 90% because you have a big financial partner you're not going to guarantee the loan what you'll probably guarantee is the completion of construction so as long as you can complete construction you have no risk and it's probably not even four percent that your risk buts closer to two because every developer has risen to the level of doing 10 million-dollar deals knows that she can charge in addition to her share of the profits a 2 or 3 percent of hard costs and maybe a small acquisition fees so maybe the total investment by the developer is a 2 percent which means that the project collapses and let's face it folks sometimes they do are you only risking a couple hundred thousand dollars if the project goes well and let's just walk through one I think three million dollar profit on a 10 million dollar deal that that's a somewhere between a double and a triple I guess it'd be a good deal the developer could net on that couple hundred thousand dollar investment close to a million - that's that's a great deal for a limited risk whoops let's go back a stage and so now if quickly enough we've kind of arrived at the heart of the presentation today and that is you had to have that financial partner for the first five or six deals you did you started out with nothing but you've been doing well you've been selling these you now have four million dollars that you can invest the question is do you do your own deal you take that that 10 million dollar deal and do it yourself no partners you put your whole 4 million and you put your net worth in that deal or if you take that 4 million and cede 10 new financial partner JV deals at $400,000 apiece 10 million dollar deal without a financial partner you put in 4 million it goes well you're going to net more than 3 million why because you're not going to charge yourself any fees that would just be creating ordinary income out of capital gains wrong way to go and you're not going to be paying a preferred return on your own money so maybe you'd net three and a half million the other hand you do that take that ten excuse me that four million invested in ten deals and you could make almost 12 million dollars so there's the comparison if you do it on your own maybe you've got three and a half million and if you do it with a financial partner you're talking about twelve million dollars at first this seems like such a no-brainer it's such a simple conclusion it reminds me since you know I could see the Hollywood sign from my hotel room it reminds me of the the joke about the Hollywood producer who went crazy and invested his own money in the movie you know it's like why would you ever do that but it may not be so simple first of all there's a couple of assumptions that I think you really need to challenge the first one is I think everybody in this room will agree that it is very hard to find a single great deal there just few and far between to find 10 in a row I think is virtually impossible so it's not very likely that you're going to average the three million dollars in profit over ten deals the other perhaps a little bit counter intuitively you everybody in business grows up to learn to hear that diversifying is is the way to go diversifying into ten deals may not be as risk-free or it may actually even be more risky than doing a single great deal I have found that when people have to push deal quotas they have to loosen their due diligence requirements and their underwriting requirements pushing deals could actually intensify your risk and then finally the point if you're meant to be a developer you can do a 10 million dollar deal all on your own and maybe you can do two of them all on your own or possibly three but at some point there's a lot of work that a lot of community meetings there's a lot it's just a lot of detail you're gonna be back to my earlier point you're gonna be taking on partners or employees so your overhead is going to skyrocket and your profit share is going to go down so it's probably not a fair comparison to the three and after 12 minutes considerably less but I think on whole unbalanced and it everybody that I've talked to and everyone I know about it I think financially the difference between going on your own versus having a financial partner it's a jump ball financially I think both approaches work just fine both can fail maybe you can do it even a little better with a financial partner I don't think that's the issue I think more it's this more of a lifestyle issue if you have a financial partner what's going to happen is they're the horizon the financial part misterwives and it's going to be either relatively short term three four or five years possibly mid term five to seven years and I don't think any of us see them longer than 10 years and when you sign up for it you say that's great I'm happy with a 10-year deal but things can change here's a real world example pension fund is your financial partner pension funds I think you all know have allocations in equities or stock bonds real estate hedge funds and alternative investments if the stock market collapses as it does every once in a while suddenly overnight the hedge fund is in it its terms over weighted and real estate so your deal you can be two years into a five-year project you can have 80% of the deal done but still not be complete and still be at a very vulnerable point when the pension fund says we're really sorry and they're nice about it we're we're really sorry but we need to sell today or you need to buy us out and you say but wait I've got two years of my life in this deal and we're gonna make nothing and the pension fund says you know sorry deals a deal that can happen the other thing that can happen take my ten million dollar deal say it's an office building and say that you lease it to you get lucky it's happening in Silicon Valley you lease the whole thing to Facebook for an incredible amount of money and you go to your your partner and now it's a some publicly traded financial company and you say guys we're in it for ten we can sell it for 20 let's sell the markets never gonna be hotter and they say no you know we don't want to do that you know sorry John we don't want to do that because that'll cause a spike in our earnings and and the analysts and our stockholders don't like spikes and earnings they'd like to see kind of a reverse bunny slope you know just kind of a nice gradual increase in earnings so we're not going to sell you sit there and grind your teeth and say oh my god we're gonna miss this market and sure enough you do and you know in fairness to Financial Partners it does I'm not trying to be funny here I'm not too hard anyway in fairness the financial partners you can have the world's best most reasonable empathetic kind mother Teresa can be your financial partner you know she can be absolutely wonderful and you can be the cause of the problem your wife can dump you your husband can leave you another project that she's not involved and can go bankrupt in two years into a 10-year whole deal you need to sell and you say mother can we please sell this project or you buy me out and then she kind of goes no you know she says that deals a deal you know we're staying in so my point is that a long-term financial partner can take what's already we all know this a fairly illiquid asset let's face it a highly illiquid asset and make it that much more liquid so our approach what happened to us again as I told you we started more than 30 years ago no money and we started with friends doing limited partnership deals doctor we still have our first big shopping center that we did with limited partners and it's 33 34 years old but we soon enough we were lucky in lots of ways one way where we were lucky was this was the early 80s and this was the SNL at time so we quickly enough graduated from doing family and friends money to institutional joint ventures and I think we probably did we had three or four partners and we did more than a half a dozen deals and some of the partners were absolutely great just one I became a very close personal friend some were okay and one a Texan he was just an absolute scorpion you know the kind of guy that that hides behind the partnership agreement just kind of waiting for you to make a mistake so he can pounce and you know but what happened was and it didn't matter whether the partner was good bad or indifferent what happened was they did invariably what was best for them not for the partnership but both best for their company absolutely understandable same thing that any of us in this room would do if we were the financial partner the problem you know for us is that usually when your financial partners remember I told you that the limited partnerships are non recourse so you do everything you're supposed to do you go out and you get the tenants you get the zoning you're you're all and you get the building permit you're all set to go and the partnership agreement says at this point financial partner will fund five million dollars so you go to a financial partner and say okay please fund and they say here are the keys oops and you look at the that agreement the other way and said gosh it's non-recourse there's nothing we can do that happened to us and that happens almost always at the most inopportune time that happens when there is no other financial partner out there to take them out because you know they tend like the rest of us to move in a herd so the herd is coming in everybody's happy with real estate or their galloping off the plains so who after that happened to us a few times we decided you know the Epiphany on the on the road to Tarsus in the early 90s was that we'd rather not have financial partners so we shifted from doing kind of larger scale joint ventures to deals 1/10 the size little deals not glamorous at all but that we owned a hundred percent of them and over the last so 25 years we've averaged a couple deals a year doing that we've sold I'd say two out of three and that it gave us the capital and when we could of course we trade but that trading didn't always work when we so we take the capital move on to our next deal and what we found I'd say to our Pleasant mild surprise that as far as we could tell the the net return to us on these small deals where we owned a hundred percent of it was just as great as you know talking to our friends who were who went the the big JB partner rate as those in the big joint ventures and maybe with a few less headaches I don't think anyone controls his or her own destiny but I think if you don't have financial partners it makes it a little easier I was talking to somebody last night at a dinner who younger guy who has the Financial Partners and he says the problem is as a young developer you can create a transgenerational asset you know maybe four or five or the things that you put together a crap but maybe one of them is I don't know on the beach in Malibu it's someplace that's absolutely irreplaceable and you know that it's going to be a great asset in like the pyramids of Egypt in three thousand years but because you have a financial partner with that five year horizon you're gonna have to sell it so you're gonna create this brilliant asset and you know has to be sold that's one thing that we don't have to do okay those of you are actually looking at the slides notice I it's duck a reference to the NTM earlier on and just kind of wrapping up you know the prepared remarks here you know what is the NTM it's not a formula it's a question it's a question I think you might consider asking yourself any time you're gonna do a partnership buy a piece of property or perhaps take a job what is it it's this what is the net to me you know people lose sight of that what you really want to do before you get into a deal is what am I gonna get out of it and it's not a selfish thing it's just an analysis let's go back to my example and say that developer elects to go the financial partner out and she's going to do the ten deals and she's got one or two going but realizes she needs a partner so she comes to you and says do this deal with me I'll pay you 150 thousand year in salary and I'll give you 25 percent of the profits and you say okay cool how much of the profits and she says well look they averaged three million dollars and so you know we can all do simple math and you say 750 thousand whoa that's pretty cool and she says maybe I'll give you another one and you say a million five that sounds pretty cool but if you're thinking about the NTM and you're a little bit more diligent and you remember this that most larger developers they have an outside financial partner and they tend to have an inside financial partner the inside financial partner is someone who typically gets half the deal for putting up all of the extreme at risk money that is the good-faith deposits to the seller the a and E that you need to put up the fees the money that goes at risk before the deal is fully entitled so you've got that inside partner taking 50% then once the deal is all set you know and the ribbons are tied around it and it's ready to start construction that's when you bring in the outside partner for 65% so doing any NTM calculation you take that 3 million and somebody here said anybody can beat me to this we take 3 million and take away 65% then take the remainder of that take away 50% and then solve for your 25% and you come up with any anybody I can't see it's about a hundred and thirty thousand dollars so it's a fair amount of money but way less than you might have told yourself and guys I'm only talking about this because I have heard time and time again here at Uli over the years people saying yeah the deal worked out it actually worked out the way I thought but I got a whole lot less money than I thought and but had they really thought about in the beginning you could kind of see exactly you know where the profit was going to be the other part about the NTM remember Einstein is famous for a lot of things one of the things he's famous for is time you know before it was just to be three dimensions now there are four time being the fourth dimension what all any of us have it and in this world is time take that hundred thirty one thousand I just use say it's a cashier's check say Bill Gates is sitting here in the front row for some unknown reason just say and then say you say you know hey bill there's a cashier's check for one hundred and thirty one thousand back there I'm guessing I don't know the guy but I am guessing he would say what the hell he'd get up walk back and take the hundred pick up the hundred thirty one thousand why his hourly rate is infinite I know the rest of us there'd be a stampede if we said there's there's a cashier's check for hundred that we've all run for that infinite return if on the other hand back to that same example that the developer told the truth to that the young would be partner and said look I'll give you the whole hunt 750 thousand but this is not an easy rezone this is in Santa Monica this is in Berkeley this is in San Francisco it's going to take twelve or fifteen years of community meetings of architectural meetings and planning and city council meetings and if you don't actually make the minimum wage on that 750 thousand you actually you're gonna feel like you did you know after your thirtieth night up to midnight dealing with neighbors who'd rather spit rose to you you know that than approve your project it's time you really have to ask yourself how much time is this deal going to take and just to kind of underscore that I remember I was present when a homeowner asked a a wily contractor well how long is this remodel going to take you know what should I expect and he said lady it's gonna cost twice as much as you originally think and take three times as long now that was a little cynical but that's act surely not so far off the mark so it's going to take a long time yeah I would think about in the net to me calculation figuring out your hourly rate now I'm going to turn it over to questions before I do I just like to point out the obvious everybody in this room is far more fortunate than 99% of people in the planet we've all been dealt a wonderful hand in the poker game of life the way to thank God or Darwin or whoever it is you talk to in the dark is to get back and not just your your money but your time I'm open for questions happy to answer anything the question was when we left the the big financial partner world into doing deals on our own how did we Hance how did we deal with having signed personally we signed personally is the short answer and you know I am I guess I almost an apostate on this issue you'll hear it guys are smarter than I am and and far wealthier tell you that they never signed guarantees and you should never ever do that that's good advice but particularly if you're starting out that's almost impossible to follow we tend to do we solve that actually you know that example I used ten million dollars with four million down I suggest if you're gonna put four million of your own money down you're gonna be really careful in that deal so you're gonna say to yourself hell I've got four million up what's the worst that can happen it'll lose that and a little bit more so but that's it we don't build spec the retail that the state of retails if there's an entirely different conversation but the the charm in retail historically was you'd have your supermarket or your drugstore or your McDonald's in tow so you might be 60 70 80 % pre-leased so we would sign guarantees but not on spec buildings so the question was in my example it was very simple it was just equity and at first of 65 percent the question was in our deals do we stick in a mez mess peace which essentially is a second if you will with participating in order to jazz up our return and the answer is no we don't do that but we're pretty cautious we try to keep our leverage as low as possible but that is you know leverage is a beautiful thing in an up market it's a way to you know get a 10x return and of course it's a way to to get killed in a down market so we're kind of cautious so we've never done a Meza piece questions what's the difference between friends and family money or Country Club money yet sometimes called and institutional money institutional money is often known as hot money and there's a reason because it's going to burn a hole in your pocket and then you know right into institutional money has a much higher rate of return to it institutional money tends to have total control of the project you've got one partner which is great you mean you sell at once so on the front end it's a lot easier but they control it and you tend to have to if with institutional money if you hit your marks absolutely perfectly you you're in and out in 24 months you tend to actually make more money than you might have with the Limited's but if you miss a year if you miss two years the the snowball and the cumulative preferred return for institutional money will eat you alive I think anybody who's done a financial partner JV has done deals that end up being okay deals where the Institute the institutional partner has a ten percent preferred return let's say and the deal works out to be a nine percent return so what happens is this the snowball just gets bigger and bigger we've done that back to that point about the hard to find ten deals that that makes sense or excuse me that make that kind of return I was thinking about it I would guess a top-flight developer in ten deals might get that kind of return that three million or thirty percent return in five or six deals he might because of the the joint venture and the cost of the money he might break even or make a little bit of money on two or three or four deals he might lose money one deal the other side of the coin the family and friends the problem is you've got to raise it in small chunks you know if you raise a million dollars at forty five twenty five thousand a pop that's 40 times you've got to sell the same story you're like a a bad actor in an off-broadway play you're just repeating the lines over this is a great deal please invest with me it's it's very hard but the return that they expect is much lower you know it's a five or six percent return and they usually tend to be long term that first deal that we did in 1982 there are limited partners they're still in the deal I can't get rid of them you know and they're delighted it's got a high return to it and the other thing is once you close a limited partnership it's harder in the beginning because you're selling it 40 times but once you close it as a the general you have much more control you don't have a single 800-pound gorilla who can say sell tomorrow or refinance tomorrow you've got this disparate group of Limited's that don't know one another so you have much better control the question was have I compared that the VC approach to the real estate approach we're in Palo Alto we we actually own the building that exhale partners which is the number one VC firm in the world where their landlord would they say hello to us on the street no do they know who we are no but we know who they are you know I think most of you know that the VC deal is that they charge two percent and they get no matter when loser fail every year of all the money they raise plus 20 percent of the profits the VC model is almost the mirror image of the real estate model I think they anticipate just take what I just said they anticipate outright losing money on five six seven deals making a little bit of money or breaking even on two or three and then getting that 10x or a hundred extra turn on Facebook or Google on that one deal it's just the reverse of ours so our worlds don't meet somebody was asking me a journalist in Silicon Valley about rich oh I asked her she said I said well what's rich and she said well are you talking real estate rich or tech rich I said never mind it's totally different story the question was when we did have joint venture partners did the institutional partner guarantee the death the answer is no they did not but when they had it we had enough equity up and then we had to do that the guarantee for the construction loans in those days yes we as the general were doing those guarantees and I think those were more than completion guarantees at that time but we also we had let's say back to that 6040 model we had a relative level of comfort that we could finish the project for that so yes there was a guarantee but and no I didn't think it was that big a deal the question was did where we were doing the guarantee did we charge a separate fee no yeah typically I did and again we don't do these kind of arrangements anymore but I think typically you get maybe a small acquisition fee and maybe two or three percent of the hard construction cost and then the with institutional partners that they make it very complicated you know we get 80 80 20 for the first so so much and then 70 30 60 40 50 but it ends up I think you add it all close to that 65 35 split that I used in my example the question was could I tell you about retail it's a sure this this is it's a great segue to going out and getting drunk I think [Laughter] we tell it I'm not a would have met back to World Series what did Madison Bumgarner's say a few years ago so I'm not gonna lie to you a me tells it in some hurt I don't think I think it's largely the factoids that I keep reading is that we have 50 square feet of retail space for every man woman and child in the country 50 square feet Europe on the other hand has two or three so we just have this enormous oversupply of retail space on the one hand it and if Amazon didn't exist of e-commerce didn't exist we'd still have a problem and one of the problems is every new retailer comes out and says well I don't want that empty box you know I need my own special prototypical box so that the building just goes on and on when you add into that oversupply the fact that ecommerce well interestingly ecommerce isn't making any money it's sure causing everybody else to lose money so Amazon is I think is on its way of becoming the world's biggest bricks and mortar retailer Amazon and Walmart are going to meet in the middle but I don't think a week goes by now where we don't see some still let's call it at least reasonably vibrant retailer telling us they're right sizing last one I saw was Kohl's I think you all know Kohl's it's a discount department store 100,000 square feet well Kohl's just came out in the last week or two with an announcement saying our right size is 80,000 feet so that means dear landlord that we're going to have a 20,000 foot vacancy in your shopping center yes we're going to be paying the rent on it but it's going to be kind of a blight in your Center and anytime a big tenant and anchor tenant has is paying rent on empty space it's a problem so and why is that happening and we all experience this I just went into the north face I like their stuff and I said yeah there's a shirt you know that I wear and sure enough they didn't have it in my size and they said and they have very limited stock in size but they said here give me your credit card I'll buy it for you online right now from our warehouse and you'll have it tomorrow or the next day the store got the credit for it so that the store rather than having a hundred shirts my size they've got ten and so the retailer's even the best retailers are shrinking the worst retailers and there's Sears Kmart panty you know they're all gonna be gone you may not have heard it here first but I'm telling you that Amazon yeah Amazon bought Whole Foods not in Amazon is like 1% of the food market Whole Foods had about 1% of the food market if Amazon weren't in in the headline it wouldn't have been a story but Amazon bought that not for food but as a distribution channel and the Amazon customer and the Whole Foods customer they're identical you know high-end very tech savvy Amazon is going to buy for pennies on the dollar I'm guessing Sierras or panties or Kmart or one of these guys and suddenly they'll have a nationwide distribution system of boxes so because that no one has solved out the cost of last mile you know Amazon frankly loses money on e-commerce they say they can make money when they change their business model but I'm not so sure so Amazon sooner or later is going to come around to saying okay here's our distribution center you drive the last mile just like you're going to Costco you come pick up the toilet paper the books or whatever it is that's my take on retail it's a I wouldn't recommend anybody jumping into the retail business right now that question was given what I know now about developments should I picked another career now as it's worked out pretty well for us it's fun I love doing deals it's like a three-dimensional New York Times crossword puzzle it's sometimes it's challenging but no I think it's a lot of fun I highly recommend it that's why I'm here talking to you guys the question was what wider developers want to develop on the coastal flats where we absolutely know that the waters are rising and every time so I live in Northern California the Russian River it floods every other year and every other year the same people are standing out in front of their flooded house ale I don't know what we're gonna do well dude how about just building your house 10 feet higher you know what are we talking about here it's the same thing I think it's it's a shame you know that there's so many things that you can kind of rail or rally against but the fact that we use public money to buy insurance for private landowners on beaches where we know they're going to flood we should give them you get one bite at this Apple and if it floods once here's the money but we're no more no more insurance I totally agree it's crazy the question was it there's knowing what I know today if I started to get in 1982 what I do things differently yeah I don't know it I'll be honest that things have worked out pretty well so I would not want to tempt fate and say I'd like to start over yeah I'm pretty content so I guess no we made it you have to make the mistakes along the way I think in order to get there you you can't just you could read my book but you're still gonna make the mistakes you know you just something's the only way to know what fire feels like is to stick your finger in it question was what do I think about crowdfunding I've been agnostic about crowdfunding there are two basic kinds of crowdfunding one is a pure platform we're just putting investors in touch with developers you know so that in the crowd funder uses the software and so I as a developer put my project up and then I attract investors that way and that actually seems to me look like it should work and that's the the crowd Street approach and then the other approach is realty mogul I think it's called where the crowd funder acts as the general partner you know what I think the problem with crowdfunding thus far but they'll solve this gradually is they don't have the experience the guys who run these it takes I don't know five ten years to get good at underwriting real estate to get good at underwriting loans so to expect 20-somethings who are very adroit technically you know to do in with the software to expect them to be able to underwrite these projects I think is asking too much I think the pure platform is will work but the point I raised to get this lunch today just coincidentally was the best developers already have their financial partners or they do it without financial partners so who is going to be attracted to the crowdfunding it it's either new young developers who don't have a track record new can of attract capital any other way and developers with spotty records so I think the hardest part is getting the quality developers to adopt the platform I think it'll come they said there's Jared Kushner has a big crowdfunding platform what's it called cadre yeah I just heard this is breaking news to me so Jared Kushner and thanks dad has a has a crowdfunding platform that was called cadre George Soros is backing it and it's already evaluated 850 million dollars and it's a pure platform but kind of high-end so seeking the you know the family investment funds and everybody else so you try to so a developer do such as ourselves we try to get million dollars here 5 million dollars there so I think it's going to work ultimately but I'm not sure it's there yet and I said I still worry about the quality of the sponsorship so the question was at the amp the Amazon sweepstakes where are they gonna go and should a city bend over for Amazon I'll answer that and reverse I don't think any city should bend over at all that just drives me crazy when we shouldn't be giving money to public stadiums or ballparks and we should not be giving money to tech companies that are putting mom-and-pop businesses out of work absolutely that just drives me crazy I think the other thing is that the city that will win and I don't know who it is doesn't need to give them anything because Amazon has to go where smart kids are smart tech kids it cannot if Winnemucca Nevada says we'll give you a jillion dollars Amazon still wouldn't do it because there's no talent there you know so you know the winner had already won and introduced a screw you Amazon you know you know it's alright if you love to Tom Petty rest in peace it's alright if you love me it's alright if you don't the question was when we tie up a deal do we put in a promote to do oh I'll try to say it a different way we don't have outside partners anymore we just use our own capital so if as a result of that we don't have any preferred returns we don't have any promotes it's just money and money out life's pretty simple that said you know we're now if you're a successful developer ultimately you know you aged out you could only go to Planning Commission meetings so long it's true and so now we're funding younger guys and there are promotes in there but and and again it's the typical Country Club deal where there's a small fee to the developer on acquisition and then a 2 to 3% hard cost piece and then whatever it may be a 5 or 6% preferred return maybe it's 7 and then say a 50/50 split and that's that's the classic Country Club deal and so now we're on the money side of that and that that's kind of you know where they end up yeah the question was am i concerned about the cost of housing in palo alto west LA and everywhere and the answer is yes if palo alto the median home price is 2.2 million that is insane so basically everybody has been priced if you don't inherit the house or if you're not a tech guru you're not buying a house in Palo Alto anymore I mean to doctors to lawyers you still need to save the $500,000 for the down payment and then I think you need about 300 I did this math once to qualify for a million six loan you know on that 2.2 you put down 600,000 you need about 350,000 in income so very few people have that yeah and the answer is simple it's density you know and it you know I hate going to all these conferences where people kind of dance around and you know we all recognize ya the cities have to increase density but they're not so far it's something that the I think needs to be mandated by the state in to vastly increased density towns like Palo Alto have just raised the drawbridge or Brentwood down here I imagine Hillsborough and Atherton in Northern California all over the question have have we followed the evolution of financial capital and financial institutional money and the answer is no once we got out of it you know we were kind of content in our little world so I kind of look over my shoulder and see what guys are doing I do understand that there are institutions now for example that are doing longer term hold deals in that point where you know you create this brilliant asset and your financial partner says well gee sorry you know you knew you knew we were a stake when you mean we did the deal you knew it was a seven year old we got a sell but I understand there are partners out there that will do longer holds but that's not something that we've really investigated alright ladies and gentlemen thank you very much [Applause] [Music] you [Music]

Channel: Urban Land Institute

Views: 107,892

Keywords: ULI, land use, real estate, cities

Id: mfRm75M42x0

Length: 47min 29sec (2849 seconds)

Published: Fri Nov 03 2017