All Forum Posts by: Barry Ruby

Pablo,

Working with an experienced developer that is willing to share knowledge and provide you with an opportunity to apply it IMO to be your best bet. I am not familiar with what a Masters in RE Dev teaches you or qualifies you to do with it, so I'm no help on that. As to doing Fix/renovations, there is a relationship to development and would most likely boost your learning curve.

If development is your goal, I think that your steepest potential learning curve is to find your way into a party or entity that is doing development work. Your chances of success in doing that will increase to the extent of whatever value you can bring to that developer, like your architecture background. Find sites, help with due diligence are other "assets" you bring to the relationship.

Good luck in your journey

Hi Pablo,

A guy named Willie "The Actor" Sutton was asked whey he robbed why he robbed banks his response was "because that's where the money is". 

I think architecture is a fine way to gain exposure the real estate development process. However if development is your goal, IMO the shortest distance between where you are now and becoming a developer is to get yourself aligned with a developer sooner rather than later.

Architecture is a critical piece of the development process. So is contracting, engineering, loan and property brokerage, legal, accounting and so on. Development involves and requires a knowledge of and ability to "speak" and relate to every professional discipline associated with executing a ground up development.

I have met exactly ONE architect during my 50 year development career that had an in depth knowledge of how a deal is put together. He was a great asset to me by providing his views on how A&E fit into the development process. He was and remains the one "rare bird" I have encountered that acquired development skill set. 

If real estate development is your goal, get as close to the process with an experienced developer as soon as you can. The shortest distance between two points remains a straight line.

Hi Ben,

Congratulations on your entry into the world of RE development. I am developing a 140 unit MF project in Colorado that is focused on producing as many affordable (entry level / workforce) units as possible. As much as possible, Project design will include; passive and active solar, ground source heat pumps and water catchment / recycling. These factors are part of defining affordability in terms of operational costs.

Reducing Op Ex should start with Project Design, which should include a deep dive into running a cost benefit analysis on energy efficiency for the items noted above including considerations for the building envelope, insulation, window/door package, framing and lighting and water consumption.

Actually attaining any or all the of the goals noted above generally comes at a cost that typically falls on the developer which sets up an interesting conundrum for the developer. The challenge being that the developer needs to be okay with increasing development costs that will mainly benefit the Project residents. An argument can be made that these efficiency upgrades will give the Project a marketing "edge" over competition that does not have them and therefore benefit the developer in reduced vacancy and a possible bump in rent rates. While the ability to realize the benefits of the "edge" is debatable and can only be known "after the fact", the developer's increased costs are solid and known from day 1.

The developer's challenge in selecting what is in and what is out of the Project design that defines first cost and Op Ex is to make sure that these elective issues have been thought out and know that they were made by applying as much thought and analysis as possible.

@Mayer M.

Hi Mayer PM me and I will send an intake form that will allow me to run my pro forma on the project and share the results with you

@Nick Cucci Nick however you decide to go make sure your course of action stays on the right side of the law.

State and Federal laws are in place that address the need of proper licenses to legally receive finders fees for investment and or real estate services.

@German E Franco in addition to how a cap rate is determined (calculated), I like to think of it in terms of a Line in a Simon and Garfunkel song.

It goes: One man’s ceiling is another man’s floor”

Meaning that the same cap rate is the buyer’s unlevered yield (rate of return) and the seller’s valuation factor.

The higher the cap rate the better the buyer’s return and the lower value of the property

Jason, Sorry to hear about your experience, some folks seem to misinterpret trust with weakness.

If you do file a lawsuit, here are a few things to consider:

Do you have a formal contract signed with the contractor?

1. If the answer to #1 above is "yes", Does that contract support the claims you are about to make in the suit?
2. Does the contract address damages? If it does, can you prove how you were damaged and how much it cost you?
3. Does the contact have a prevailing party clause, if it doesn't does the state law that controls the contract require a prevailing party clause?
4. There is a difference in being "Right" and being able to prove it. There is a difference being able to prove it and winning the suit AND there is a difference in getting a judgement and being able to collect on it.

The importance of understanding the above differences can't be over stated. Make sure that you don't find yourself winning the battle and loosing the war. That is, you could find yourself proving your case and getting a judgement for $10,000 or more only to find out that you owe as much or more in legal fees that you can't be reimbursed for and worse yet, can't collect against the defendant because it has no assets to come against.

Food for thought before you pull the legal chain.

I can offer my personal experience on this subject by saying "Don't do it" if you are not prepared to recognize and accept the absolute difference between being a property owner vs providing services to the Elderly (or anyone for that matter). Elder care can mean Independent Living, Assisted Care, Nursing and dementia. The greater the need of the resident, the greater the need for skilled staff which includes management and attendants.

My wife and I built an independent care facility with the goal being to have it operate on a fee structure that could succeed on Medicare and Medicaid payments, which would make a room in the facility available to anyone who was broke but did have access to government funding. We built a ground up state of the art facility and covered the equity requirement through the sale of Low Income Housing Tax Credits the project was awarded by the Colorado Housing and Finance Authority (CHAFA) and sold the credits at a discount to a major national bank.

We understood from the start that operating the facility required an entirely different skill set that those needed to plan and build it. We picked the wrong operator and ran into many problems getting the facility filled and functioning efficiently. 

Bottomline, we will NEVER use an LIHTC award program and never do an Elderly care facility again. Real Estate development is difficult enough without voluntarily adding layers of complexity and risk to it.

Hi Shay, 

As to Item 3: If you pursue a land lease make sure you secure as long of a term as possible which can be accomplished with a 25 year base term + 5 four year extension options or maybe even a 99 year term if the Lessor will go for it. Also make sure that the Lessor agrees to subordinate its leasehold interest to any senior debt you may want/need to access. 

Both of these factors will play a very heavy role in accessing capital. Lenders will have a very hard time making a loan without being in a 1st position. If you can't get the Lessor to subordinate the next best thing would be to include a "right to cure" clause in the lease. This would protect the lender that is in 2nd position that requires the lender to be notified of a breach in the lease on the Lessee's part and give the lender a chance to preserve its capital without being wiped out if a Lessee default was claimed and not cured by the Lessee.

My understanding is that a recapture tax will be due upon sale of the property. The recapture tax rate is 25% against the allowable depreciation over the holding period WHETHER DEPRECIATION WAS TAKEN OR NOT. The depreciation amount is calculated by taking the original cost basis of the property less all non-depreciable property (which is typically land and other soft costs) divided by 27.5 years times the number of years the property was and held.

For example: Assuming an acquisition cost of $130,000 - land value and other non-depreciable assets of $30,000 = depreciable a $100,000cost basis. Assuming the property was held for 10 years, the 25% recapture tax would be an amount equal to $100,000 / 27.5 = annual depreciation of $3,636 X 10 years = $36,636 X 25% = $9,901 recapture tax owed at exit.

I am NOT an accountant, so please check this logic with someone that is licensed and qualified to properly determine these factors. In any event it appears that taking depreciation would have saved the property owner with a combined 30% federal and state tax rate $11,000 over the 10 year holding period (Total Depreciation X 30% = ~$11,000). Depreciation is a property owner's friend especially if segregated bonus deprecation is an appropriate method to apply to a property. Segregated Bonus depreciation currently allows 100% of all assets that have a life of 20 years or less to be entirely written off in Year 1 of ownership. 

Plug that into a cashflow to see how much this can spruce up an IRR!