ULI Making It Big Real Estate’s Road to Riches

good morning thank you Bob for that kind introduction and thank you ladies and gentlemen for coming this morning I'm very pleased to be here making it big as the sixth in a series of talks I've done on starting running and hopefully succeeding with the development company you in any of these specific topics you might take a look at them or you know as Bob mentioned steal a copy of making it and real estate the book by the way is intended to be a primer more of a just an outline of good general business principles or real estate principles it's not intended to be exhaustive those people who like it some do say they like it because it's short its brief and speaking of brief I'm going to give you a brief history of my background to give you some context my partners and I started 37 years ago developing neighborhood shopping centers small centers fifty to a hundred thousand square feet anchored by supermarkets and drugstores over those 37 years we've done about 80 deals most of them retail and because we gave up financial partners about 20 years ago we historico lee we've sold two out of three properties why do we do that we do that in order to have our own capital for our next project despite its challenges just as an aside we continue developing retail we have three projects under construction right now one a kind of a classic small neighborhood center two small relatively they're kind of the tail on the pig of enormous mixed-use projects and we're buying a fourth Center the trick right now with retail of course is the internet and I may come back to that we're also investing in small scale residential and office in Silicon Valley now I'm going to apologize to those of you who aren't sports fans because in order to make a few basic points that are often overlooked in real estate I am going to rely on baseball the top level of professional baseball is spread over or separate division single a ball double triple and of course the big leagues you all know that the players at one level are better than the levels below what you may not know this about professional pitchers they all throw the ball doesn't matter what division they're and they all throw the ball 90 miles an hour a scout won't look at a pitcher who can't throw the ball 90 miles an hour what's the difference the difference between a rookie and single a ball and a sigh young winner is what it's control it's keeping the ball over the strike zone or more accurately for you true baseball fans on the corners of the strike zone now you may be just as smart as a major league developer you may be able to throw at 90 miles an hour in real estate but you need to have control you need to know the parameters of your strike zone in short you need to know where to develop our strike zone it's pretty simple it's where growth meets supply constraint your target city where you want to develop needs to have current growth and long term prospects for solid growth I would caution you against mineral base growth oil booms gold rushes mineral growth always has a way of playing out you've all seen ghost towns across the country growth that you can rely on is the usual suspects tech medicine finance universities even aerospace now something new has come up just as when we look at a shopping center today we have to think about what is the impact of the internet on a shopping center how many of those tenants are possibly going to be put out of business by the internet I think it's time to consider climate if you're starting out if you're 30 to 30 years old and you want to be developing for the next 40 years I think you might consider climate and where you're going to develop this isn't a new thing the Anasazi Indians the famous ancient Pueblo Indians had an amazing society not too far away from Phoenix on the Arizona border went from the 12th century BC until 1275 ad what happened to them an extended drought an extended heatwave well folks today in Phoenix anybody here from Phoenix good sorry I'm today in Phoenix you can fry huevos rancheros on the pavement it's 106 degrees is the average summer temperature 106 degrees folks there are plenty of seats in front the question is how much hotter does it have to get before a town like Phoenix becomes unbearable Time magazine had an article just last week about a city I believe it was in Pakistan where it is unbearable it's north of a hundred and fifteen degrees and to belabor this climate point I would also wonder whether it's a good idea to develop in coastal Florida Houston is booming right now but Houston and the whole Mississippi Valley are suffering from what they're suffering from catastrophic floods how often does that happen before people say gee I don't want to be there anymore at one point I cannot stress enough it is very hard very hard to make money in cities without growth in cities that cities that are losing population it's almost impossible st. Louis Missouri is down 60% from its peak population so is Youngstown Ohio that list goes on and on you can Google something that says cities that Americans are leaving the list is a mile long it breaks your heart to read it I suggest to you that would probably break your wallet to develop there last week the Wall Street Journal I love The Wall Street Journal but it doesn't always get it exactly right on real estate The Wall Street Journal ran an article about Millennials fleeing big cities fleeing the coast and moving to Denver moving to Boise usual places and talking about the growth in those areas the millenials what are they fleeing they're fleeing congestion and traffic what are they rushing toward housing affordability it's great those cities are booming right now but what to those cities lack Denver Boise they lack supply constraint they don't have the physical borders Mountains to one side rivers to the other and ocean and at least so far they don't have the political challenges so consequence supply constraint without development constraints growth can turn out to be essentially no growth I'm going to tell you a story in 1981 I was 29 years old we bought our first project that was over a million dollars and I was so proud of it it was a couple of buildings in Sacramento where houses Sacramento then and now has an ocean of land around it well it turned out that the guy we bought from owned most of that ocean of land his name was buzz Oates he was an industrial developer and as it in addition I think he probably won that land in a poker game folks because he basically had a zero basis in it he also owned that an industrial construction company so every time Rance moved a penny he built another million square feet of spec space what happened rents never moved we worked on that deal for ten years if the art that project was in ICU a real estate intensive care for ten years and we were so lucky we uncorked the champagne when we got our money back out of the deal ten years later and we broke even and we thought oh my god that's a home run why because there was no supply constraint and Sacramento still very little supply constraints Sacramento where is their growth handcuffed by supply constraint you know where it is Manhattan and San Francisco are great examples Silicon Valley is another great example developers there only throw 90 miles an hour they're no smarter than you or the guys in Youngstown but they're surrounded by water and supply constraints if you're lucky enough to be in the sweet spot if you're lucky enough to be living where young smart people are migrating where jobs are plentiful you stay there a couple years ago I gave a talk in a let's say faltering Midwestern state and I was asked what my best development advice was and I couldn't tell the audience the truth I couldn't tell them guys what you really need to do is move I just I looked at me Zak Jon you can't say that there are seats in front if you like but that's what I'm telling you today if you want to succeed in business you you need to go to that location idiot to your strike zone supply constraint or you can have one hell of a commute now once you have picked the right city and in the cities can vary once you have your let's call it your Emerald City where you're going to develop where within that city do you want to develop God God himself probably gave this advice to Adam and Eve as he was kicking them out of the garden in the of Eden this is the oldest advice in real estate pick the worst property on the best block you can afford starting out you know if it's boarded up that's good if it's boarded up and half burned down that's better if it's boarded up half burned down and occupied by squatters that's best you know it's the product type you know I used a house as an example but the product type doesn't matter this is one size fits all all product types work off the same playbook but I think one of the ways to succeed when you're starting out is to limit your as much as possible to have as few risks as possible I think the biggest risk in development is vacancy you build your project you get it all set and nobody comes to the party you don't lease it I think historically in most locations single-family residential is the kindest in that way it has the lowest vacancy rates of single-family residential not a bad place to start but this advice is definitely one size fits all just as important as the where to develop is the who the who from whom do you buy this worst property choose an unmotivated seller chase an unmotivated seller and if you're lucky if you're lucky you'll waste your time and some of your money on due diligence if you're not lucky the way I was not lucky in 1981 you'll actually buy the property you'll pay too much money and you'll end up regretting it for the next ten years when a broker pitches you a listing your third question right after price cap rate should be why why is the seller selling what's his motivation and if it's some BS about oh the seller wants to kind of write sizes portfolio or the seller is moving from one product type to another my suggestion is that you run for the door I wish I had known this you know there's an old-line experience is something that you acquire just after you need it I wish I hadn't I wish I had known this in 1981 but buz Oates was an extremely wealthy developer he had zero motivation to sell to us but you know I had to prove that you know I was a hitter that I could do a million-dollar deal so I paid way too much money for that property and regretted it ever since oh and for the record the mistakes that I'm talking about I've made every one of them myself personally today the mistakes I'm telling you to avoid I've made them instead of going to graduate school in real estate or learning the trade with the fancy development firm I pretty much learned it on the street deal by deal to paying a lot of tuition anyway the answer to motivation this is pretty simple it's easy to remember because all the right answers to what's the sellers motivation they all began what with the letter D did the seller die is she going through a death grip divorce do the partners hate each other yeah are they gonna lawsuit with each other or did the seller lose half of her portfolio due to a flood or a fire this is true motivation folks this is worth stressing but yeah the other thing is it easy to find a motivated seller in a tightly constrained area selling of the property on the worst block no it's not easy at all anybody who tells you that getting rich in real estate is easy probably has a show on daytime reality TV you know the answer is a real estate is just as hard as any other industry it's fraught with risk and it's difficult to succeed but you can do it no by the way if I had to choose between supply constraint between the sweet spot and a motivated seller I would take the motivated seller every time because despite what I said if you can buy it cheaply enough if you can find somebody highly enough motivated you can probably make money on real estate there's another old line there is no bad real estate just bad pricing that you can probably think about remembering another question I'm often asked by people starting out in business is when should I start plenty of seats thank you when should I start when should I do my first deal some of you have talked to me in the past you know my answer is always now do it today if you're trying to time the market perfectly if you're trying to wait for the next downturn you're not going to make an offer until the next solar eclipse it's really hard to do and if you're it sure it's always better to buy in a downturn but if you try to time that perfectly it's just not going to work if you're in the market all the time if you're looking for deals all the time you'll be in the market when the next downturn comes when there are more deals suddenly available but you're not going to find those deals by yourself and unless you're already rich you're not going to be able to have the equity or be able to finance them so how do you throw ninety miles an hour how do you hit the start the strike zone how did you pull this off you do it with help from your new friends brokers partners and bankers in that order by far brokers are the most important we can dispense with a common self-delusion one that i had you're not going to find a great deal by yourself you know you think you may be able to you just not you have a day job you're looking at properties online you're driving around on weekends trying to find properties he'll you maybe even quit your job to go find properties but you're competing against professionals who deal hunt 12 hours a day who are sitting in offices with 30 other guys doing the same thing you're not going to find a deal rather than waste your time trying to find a deal find a broker find the best broker you can who will take you seriously and become his or her best friend how do you do that you know and if you're 23 and penniless might be one or two of you like that here your best broker may also be 23 and broke but you've got to start somewhere so you decide you found your emerald city doesn't whichever works for you then you decide on a product type and for this morning we're gonna say it's industrial just for fun so what do you do you go out and find the best industrial broker in your city that will take you seriously you call her you say can may I come and see you may I buy you a cup of coffee and then when you get in front of her you promised her a hundred percent commission you don't make the mistake I made of trying to keep half the commission for yourself big mistake and then on top of the full mission you say I'll give you 5% of my deal on the back end and some of your saying whoa whoa whoa John WTF you're going to give away more than a full commission the answer is yes I would it's very hard to get a broker particularly when you're starting out - again plenty of seats in front guys if you want to sit down very hard to get them to take you seriously the way to do that is to pay them more money yes thank you the question was when I said back in when you sell it what I'm talking about is you know I'll get into the partnership split in a second but if you the developer are taking 30 40 50 percent of the back end you tell the broker I'm gonna give you a percentage of my share just for helping me out with this obviously the big brokerage firms frown on this you need to get their approval much easier to do with smaller independent brokers and back to this point I made don't get a broker's license there's a big temptation to say I'm gonna get a broker's license I'm gonna go out and find deals and I'll keep half the commission and my partners won't care that's a mistake while you're out scouring for your next deal with your new best friend that broker you also need to be raising money at the same time if you do find a great deal you're not going to have much time once you have it tied up you're not gonna get a long contingency period especially if you look like you're 15 years old that's just that's going to be tough to do so you need to raise the find the deal raise the money on parallel tracks so what you do is you go to your friends and family let's say anybody you think who's good for twenty five thousand just a pick a number and you pre sell them on the idea you say I'm gonna go out and I'm gonna find fixer-upper industrial deals and I would love you to be my partner and they're going to be great and you'll get a 10% return whatever the number is it's pretty easy because you're not asking for commitment you're just asking for a commitment to seriously consider the deal when you find one word of caution there people will everybody wants to be a player everybody wants to be a partner so it's easier to get people in the beginning to say oh yeah I'd be very interested don't if you think you've raised half a million dollars that way be a little bit leery of how much you're going to end up with I've talked pretty extensively in the past about partnership split so I just want to make two points on partners today for those of you starting out the typical deal the typical split between the developer on the one hand and the money on the other for a ground up involved let's say somewhat risky deal it's the money that the equity gets repaid all the equity plus somewhere between a 5 and 7 percent return before the profits share in that profit share is roughly 50/50 and then the other for those of you trying to raise money it's easier to raise money if you promise your financial partners that they get all their money back before you share and you might take a very small fee upfront but if you say look Jack you're gonna get your money back plus 7 percent before I see a buck at least they know that if your your mind is in the right place now at the same time you're looking for deals and you're raising money you need to start talking to a bank what you do there is back to your emerald city you find a small local bank because we're talking pretty much about small deals a community bank someone where they that will actually talk to you you go to that bank you make as large a deposit as you can afford to make you ask to speak with a loan officer and then you lay out this is what I'm going to do I'm looking for deals in the two to five million dollar range there's going to be industrial they're not going to be much risk and here are my list of potential partners all I need from you is a bunch of money what you don't do with a bank particularly when you're starting out you don't argue with the bank about guarantees banks don't like this and I don't think folks particularly if you're starting out there's any practical way to get away from giving a guarantee rather I think I would suggest you convince the bank that you're reliable you're honest and you're smart the way to do that is be reliable honest and smart of course and then have meetings with them quarterly reports you want the bank to know that you are competent and you are working hard on it things do go wrong in real estate and if the bank thinks that you're honest and hard-working when things do go wrong you have a much better chance at the bank working with you rather than taking the property back okay let's bring all these threads together into a hypothetical deal I picked this one because on the one hand is it's about as ugly as ability yet but we have any architects in the room there's one architects had loved that expression it's got good bones I think this but when I looked at that wow that's that's got pretty good bones so anyway this hypothetical industrial building and we're gonna put all these threads together we're going to say that that hypothetical building is we're in Grand Rapids Michigan I've never been there but I just read it's one of the fastest-growing cities in the country so strikezone check we're gonna pretend that this decrepit building is the worst one in the industrial park sweet spot check we're gonna pretend that industrial that it's probably true has a zero vacancy factor so we like that we don't have that vacancy risk and we have a highly motivated seller because sadly the seller died he needs to sell all right and then how did you find this old dog through your new best friend the number one industrial broker who are your partner's you've raised it with your family and friends and your local community bank is your bank in other words you all that formula it all went together this is kind of a happy ending story here and what did you end up buying you bought a two and a half million dollar building you raised a million dollars in equity you're going to put five hundred thousand into capital improvements into tenant improvements in to paint and petunias whatever so it's overall it's a three million dollar deal this split in the equity ninety percent to the financial partner ten percent you would be putting up as a developer that's a very common financial partners often want to see a little money in the deal but notice that you're charging a fee of fifty thousand so your net investment in the deal is fifty thousand dollars that fee I don't think financial partners care much if you say I want a one percent acquisition because look dude it's taking me four months to put this thing together they don't tend to argue about that and at the end of the day the money gets a preferred return of 7% and then there's a 6535 split this is and I mentioned before a 50/50 split that was a ground-up deal this is more of a paint and petunias deal and so that the less risk the less work they split for to the financial partner tends to get greater so a happy ending on this deal for us we did it for three million we sold her for four million and somehow magically I forgot to put in the preferred return so we simplified this slide the financial partner got a seven percent preferred return somewhere else million dollar profit six hundred fifty thousand to the money three hundred fifty thousand to you plus your fifty thousand fees that's four hundred thousand dollars so folks what I would say if you could do this this little deal once or twice a year for the next 20 years you'd be in the major leagues that's in fact you'd make the Hall of Fame I noticed in the after I'd put together the presentation that I had failed to answer a couple of the points that I've raised in the Talk description debt versus equity when to use debt when to use equity how much of each my take is if you go all debt or close to all debt that's great it's highly leveraged some of us in the early 80s we're using a whole lot of debt like a hundred percent financing but that leverages your risk enormous ly to a catastrophic level just as a point of reference the the Great Recession 2009 commercial properties dropped nearly forty percent forty percent value across the board across the country so had you financed 70 percent 80 percent even 65 percent and had your loan come due in 2010 11 - even in 12 you had you were in a world of hurt if you go all equity just the other approach that works the problem with all equity is there's no risk in all equity if you talked let's go back to my example if you talk to your partner's into putting up three million dollars they'd say well thanks John that's great but you're not taking any risk we'll pay you that 1% fee and get out if there's no risk there's no reward for the developer so the answer is you use both debt and equity on every deal what's the right amount of equity again think about that 40% caddis catastrophic amount rather write down I think a very conservative very conservative equity is 50% aggressive is probably 65 to 70 the sweet spot may be 55 60 % that's about what we do we do about 60% and this question I think I threw in there this is a very long discussion there are guys in this room who have kept their financial partners for their entire career for 40 years guys walking around this Convention Center who have done brilliantly keeping their financial partners forever and then then there are those of us who went that down that route and decided no I'd rather go it alone it's that's the one thing I love about business there's no single right answer there are a million ways to succeed in business you can go it alone you can go it with partners we chose to go it alone so my answer would be if you asked me when should I give up my financial partners I would say as soon as you can as soon as you do your third or fourth deal and you can say okay jack here's your two million I'm gonna take my money and I'm gonna go do my own deals ladies and gentlemen if you're smart enough and you are to succeed in the highly difficult challenging world of real estate you're also smart enough to know that financial success is not what you are going to be ultimately measured by Jim Curtis was an enormous ly successful investor and developer made millions as one of the most respected guys in the country but what Jim will be remembered for is not for the money he made but what he gave back the countless hours he gave back to the uli over nearly four decades the millions he gave to charities I'm gonna suggest to each of you today you know before I turn this over to questions that you consider giving back not just checks but your time when you have an opportunity 90 everyone in this room is far luckier than 99% of the people on the planet and the way to show gratitude for that great luck is to give something back and now I'm open for questions because we're recording today be useful you can shout it out if you want and I'll repeat it back but there are mics on either side can you please rate the difficulty of various product types retail residential hotels so on so the question was what irate back to choosing the specialty that that you want to work in the discipline would I rate the difficulty I would say and there are people in this room no better but I would say hotels are probably the trickiest and resort hotels with tricky going down to a single-family residential is probably the easiest retail is tricky because retail and hotels are you need to I think be all in or all out they rely a lot on connections on people in the business I think industrial is somewhere in the middle industrial might be easier than office so I think I would go single-family residential easiest industrial multi-family residential office retail and then hotels yes sir describe a bit more the relationship why you prefer to use about 65% debt opposed to mostly equity on your projects the question was can I describe why I prefer to use sixty percent rather than all equity well actually we do often use all equity or very little debt but right now let's say properties are trading five six percent return maybe you get a little bit better seven percent if it's a little bit riskier property you can finance those properties at 4% if you finance 60% at 4% and you're getting let's say 6% on the balance you can substantially increase your cash yield that's the reason to do it yes sir hi how are you today thank you for your time sure so I your book you talk about deal size and I just want to hear a little bit more about deal size and kind of the idea of you know the four million dollar deal versus the twenty five million dollar multifamily you know one hundred and certain so unit type of deal how do you look at it the difference is in those two deals in terms of deal size in terms of risk in terms of returns so the question was deal size of let's say a four million dollar deal versus a 50 so that this goes back to do I want financial partners or not what I have found you know I act as a mentor each year for the last ten years and so I have five or six smart young men and women every year who work for usually they work for large developers and we'll talk about hundred million dollar deals and I'll find out that you know the development company has an internal partner and then there's an external partner and there's often a capital stack and I have found that a hundred million dollar deal that sells for a hundred and twenty say twenty million dollar profit the principal's at the end of the day after you pay out outside partner inside partner and all these splits they still end up making a couple million dollars not that that isn't a lot of money folks but I have found that for a little deal that you own yourself back to why I don't have outside partners you buy a little deal for four million you put a million into it and you make that same two or three million dollars that you would on a hundred and twenty million dollar deal without the risk if you're building a hundred million dollar deal and things go sideways interest rates go the wrong way construction costs go the wrong way much more likely to have a loss that yes sir I missed a good morning so I am and this means like I'm a graduate student from Peru college so I want to ask you are you a big and maybe still Vic as a simple question so what do you think that technology will transform our industry and the second question is you you think that we have to keep the relationship the bankers and brokers and partners so so it is any possible that in the future that we can only use technology like create and just have a small studio to help us to with the technology algorithms robots to calculate F in the risks and to we can it's not account time-consuming and you can keep the the lowest cost I think maybe so do you think no is it possible that a robot all albums chakra knowledge and just combined three rows brokers and bankers and partners just one and to help us to do the finish the race cuz dad thank you yeah wait I'm not sure it was your question will there be a robot that can be your banker your broker and yeah stupid I just really curious to ask you yet thank you for your time yeah yeah III am kind of I'm old school and a bit of a contrarian I'm not sure that that tech is is going I think ours is a very personal business you know I think you're hearing me stress personal meetings I don't I think you've got to get in your car you've got to go meet people you've got a drive i-tech has made some inroads but it certainly hasn't somebody asked me and in my role as a columnist to look at it there's a software program that is supposed to eliminate developers you know kind of a developer in a box software program and I'm not sure that's taken over so I don't have a good answer on that one thank you thank you sir thank you thank you for asking yes sir I John have a simple question do you sign guarantees yeah the question is do I sign guarantees and that folks is one of the biggest lies in uli you'll hear almost everybody get them so man I never sign guarantees well the answer is I do sign guarantees that look there's a little bit of background in construction there are two kinds of guarantees there's a completion guarantee that is I hereby promise that I will finish the building and then there's a repayment guarantee which is I hereby promise that no matter what happens I will repay there the construction loan everybody signs completion guarantees so the guys who say they don't sign guarantees they're just putting the completion guarantees aside okay it is hard do I sign completion get do I sign pre payment guarantees yes but this goes back to our method of doing business we use our own money so let's just keep simple let's say it's a 10 million dollar deal and I've put 4 million into it or 5 million into it and I'm borrowing 5 million do I care I know I'm not gonna walk away from my 5 million so do I care if I promise the bank that I'm gonna repay their 5 million the answer is no but if I were going with financial partners and if I had one of those Tower of Babel capital stacks first loan second loan Meza peace inside outside partners so it's like 95 percent money I'd care a lot and there I would try and I would not sign guarantees yes sir hi my question is what do you think about doing fee development or consulting to pay the bills while working on equity deals I think that's a great idea one of the problems what I just outlined for you about how to make money not to charge any fees until you get the deals rolling the problem with that is a deal at warp speed you know the Millennium Falcon takes the 3 years from time you see it fix it up lease it and sell it so you're not going to make any money for 3 years how did I do it I was a lawyer I was actually a pretty mediocre lawyer and nobody missed me when I stopped practicing law that's true but I kept practicing law for about five years to pay the bills so if if you can do fee development that's great if you can do consulting that's great you just don't want to get too deep into it that it gets in the way of finding it your equity deals yes sir John we're homies actually cuz I'm from the Barry as well one of the the things that concerns me in in doing deals is that you know we all have you know a skill set discipline that we're good at and in supply constraint markets the political process is very difficult you know the reconstruction entitlement phase I mean is is it better when you say come from a legal or you know a financial reporting background where you know how to strut sure a deal from a compliance standpoint all of this stuff to start with a value-add project because it might not be as difficult as a ground-up great question so in the tight supply constrained markets are usually political problems it you know it's the development challenges the NIMBYs fighting you it so the question wasn't it was excellent is what about going with a value-added with an existing property you know we've been in in these tightly constrained markets for a long time and we have preferred doing rehabs growth taking an old shopping center and fixing them up unless the town happens to have a major university in it like Oh Palo Alto or Berkeley or Santa Cruz the towns will almost uniformly give you the approvals you need without a lot of police a you've got a broken-down shopping center here and we want to build a brand new one they'll give you a ticker tape parade and a metal most towns so a good way to lower your risk is is to do re remodels rehabs I don't think being a lawyer really helps the the political process of getting deals approved and make it in the way that that's just there's a long difficult process but that's where the money gets made but it's not something to do when you're starting out because you can get turned down on zoning yes sir all right thanks John for the presentation resonated with me especially being 23 penniless and just starting out I got a broker 124 anyway so my question is can you describe the range of profit-sharing splits between developers and money partners sure good question so I told you that 5050 is kind of like the teeter-totter at middle point that again is for a essentially a full-on development deal ground up or taking a deal and totally renovating it construction loan construction guarantees if I found a deal wow this is a good little bill and all I need to do is paint it and lease it up I would expect as a developer to give 80% of the profit to the financial partner this is not that much work not that much risk so I would say 8020 money to develop her on simpler deals all the way down to 5050 there I can't say that I have seen although I've heard other people other developers who were more persuasive than I am we've gotten better than 5050 deals with their money partners but that has not been the case yes sir hi John you said you sell 2 out of 3 properties that you develop to move the equity forward to your new projects because how do you identify which projects to sell in which to keep so the question was I mentioned we sell 2 out of 3 or hopefully trade when we can how how do we keep the 1 is right back to the heart of the talk supply constraint if we're developing in Palo Alto which is extremely difficult to get properties approve we keep Palo Alto so we have 7 projects in Palo Alto if we're developing in the valley remember I'm a retail developer so I work with Walmart I work with Safeway I work with Starbucks if they say hey John we'd like you to find us this location in this small town we'd we we did it not not the smoking kind but there's a town called weed in California in the middle of nowhere so we built a market there and we put that bad boy on the market it's for sale the day of the grand opening so it's essentially we want to keep our core portfolio in highly competition constrained areas thank you yes sir hey John thanks as a practicing attorney who started a real estate development company practice on the side to keep going I feel your pain from from while back we have had a number of deals where we've had to co-develop so we split their sponsorship or the GP gets split 50/50 curious if you've had that experience and how you've viewed joint venturing with other developers on a deal it does make the numbers tighter and I'm just kind of curious particularly when they're happy when I sign the guarantee and they don't but curious on your experience or anything you have on co-development deals I don't have experience with that our partners have always been either land partners or financial partners I have found though where we don't maintain control life gets more difficult and so I would not do that because I'd like to keep the control yes ma'am besides the heat how do you feel about the Phoenix market [Laughter] well actually I'm pretty lazy so so for the almost forty years all of our development projects have been within a two-hour drive you know I talked about it we have specialized in retail we also specialized geographically I think you can do one or you can do both so I finish this lovely town by the way but I tend to go in the spring so I don't really have a my sense is more climactic like oh my god things are just getting too hot or too wet sorry and so my expertise is in financing affordable housing deals and I do a lot of them and there with you know the crazy capital stack she talked about I keep getting offers for smaller equity deals that would just be you know for me and great but I struggle when I look at the numbers because I'm so used to looking at a different type of development is there any one or two resources that you would point me to to help me I guess get more comfortable with a different different set of numbers I'm sorry could you explain that a little more what sure numbers that looking at it look really low and maybe that you know is just the way it is I'm in a very hot market Austin land is expensive construction costs are really high but I have pieces of property that I know should work and I just think I'm doing something wrong okay well real estate is the most of all businesses but right now in the Bay Area very very smart guys big-time multifamily builders are sitting on their dirt because the numbers don't work you know that land prices are too high construction costs I think are going to the last I checked they were going up one percent a month and so there are major entitled projects right now in Northern California where they're just sitting on them saying we need to wait and then rents at least again in Northern California are starting to trend down a little bit the residential rents so the numbers are bad back to that to deals a year over 40 years I'll just point out that in down markets we may have bought five properties in a single year and in up we might go a couple years it gets a little scary but we we might just say these numbers don't work we might go a couple years without buying anything but it just averages out a couple of years yes sir so what's really wrong with getting a brokerage Commission by saving half the Commission so the question is what's really wrong with getting a brokerage Commission what's wrong is that if you tell brokers you say hey I'm interested in your property and I say great and you say I'm acting as a broker I want to get half a commission what's wrong is you'll never see any good deals yeah that they'll just cut you out what happens if in a down market where a seller is desperate you can you can buy occasionally you can pull that off but the professional brokers do not want to deal with you what you're trying to do again in a competitive market you're trying to get access the best straightest cleanest access to the best deals and putting yourself in there as a broker is a mistake I have found you know yeah maybe you save fifty thousand on one deal but in the course of your career if you keep doing that you just won't see other good deals I had a broker's license I figured this out I gave it up no more license yes sir would you describe what information or analysis you take with you when you're meeting with your banker or investors what what's most important what might you overlook if you didn't know better what's convincing rephrase that for me give me a little sure like I mean maybe something to hang on to okay we'll talk about the level of financial analysis spreadsheets due diligence what is it that you normally take along with you to that meeting that you know they're gonna need and if a new beginner didn't know it they might go without it what we try to do is make our presentations as simple as possible you know it's essentially like if you can't you know there's an expression if a deal doesn't make sense on the back of a napkin it doesn't make sense you're basically we're pitching the headline of it so I want to say I'm buying this property let's go back to my example I'm buying this property for two and a half million the park everything sells four to five million all I need to do is put up five hundred thousand dollars to bring this bad boy up to snuff so I'm in at three million and here are the rental rates you can do all this just like I did on once you can do it on one page you know I sell the big picture and sure you know we have the backup stuff but one thing we don't do we don't do long term projections we only figure out value to the date that the property is fully leased and in service so we'll say we can pick a valuation a cap rate twelve months out eighteen months but we don't do IRR s we don't try to sell here's what the future is going to look like in ten years I don't think that works folks it's ten o'clock I'm happy to answer a few more questions you've been a great audience thank you very much you

Channel: Urban Land Institute

Views: 12,071

Rating: 4.8620691 out of 5

Keywords: ULI, land use, real estate, cities

Id: 2ZbUZ9J1AFM

Length: 51min 32sec (3092 seconds)

Published: Tue Oct 01 2019