All Forum Posts by: Eric Lefteroff

You are correct to say that there are 3 possible explanations but I would add that there isn't just 3. Another explanation is that the way a deal is structured can heavily play into the IRR. For example, 1) the degree of the managers fee can vary and has an impact on the IRR (the smaller the fee the higher the IRR, all else being equal); 2) the profit share percentage of the syndication manager is not equal across all deals; 3) investor prefs can boost their IRR; etc.

Typically, a newer more inexperience manager will not command a high management fee nor a high profit split percentage. They will often have to offer a higher pref as well. All these things can boost investor IRR as well.

How is he selling the business?  Does he have a business broker brokering the deal?  If so, suggest that he have his business broker speak with you.  Typically, the longer the term left on the lease for a business for sale the higher the value of the business.  All else being equal, who would want to buy a business where they are not guaranteed a location?  You could easily say no to a new lease or lease extension and then the business buyer would be in real trouble.  You have a lot of leverage to use in all actuality.

Who did the feasibility report?  The planning office?  

Where did you get your construction cost numbers from?  If from a GC, how many GC's did you ask to bid?  Do those "build" numbers include demo and civil work?  

Have you accounted for A&E costs as well?  What about utilities hook-ups, permits, survey & geotech, builder's risk insurance, construction loan interest, etc.?

On the leasing side, have you accounted for leasing commissions?  Have you included any escalations in the rental numbers or are you using present day rental rates?  

Have you spoken with a few lenders or just one?

Who will be managing the project for you?  The architect?

Does "2/1" mean a duplex?  If so, wouldn't 4 * 4 duplexes be 8 units?

Any additional information you can give would be helpful.

In the final analysis, your project pro-forma and anticipated outcomes are only as good as your assumptions.  Therefore, I would double down on my research and triple check all of my assumptions before moving forward.

I would absolutely suggest you move forward with an operating agreement. It covers a lot of ground rules for the LLC and mitigates many risks. It is far more than just stating the ownership percentages and protecting you from lawsuits. Good operating agreements can cost thousands if done correctly by a reputable attorney. I would encourage you to have your attorney tailor it to your unique needs and circumstances. It can cover potential future events; however improbable they may seem today. If you have a good attorney then $200 seems like a bargain to me.

Disclaimer: The information provided by me is not intended to constitute legal advice; instead, all information is for general information purposes only.  I am not an attorney.  Readers should contact their attorney to obtain advice with respect to any particular legal matter. 

Look into mezzanine debt as an option as well.

Did you have a broker representing you when you signed the NNN lease? If so, how is their commission being paid? 50% upon lease signing and 50% upon C of O? If that, or something similar, then your broker should continue to work with you and be able to answer these questions.

1) You should always have property insurance on your property along with other types of insurance. I would recommend finding a reputable insurance agent and working with them to determine the best coverages for you.  You own the building and still need insurance protection.

2) It is completely normal to have rent start upon the issuance of a C of O in a retail space.

3) You didn't screw it up.  

4) When speaking with industry professionals I would encourage you to ask lots of questions and get referrals from people you trust.  You need to balance your fear of not being taken advantage of with the opportunity to learn.  Speak with several professionals in each discipline.  This should help you identify who is legit and who is inexperienced or shady.  For example, if several GCs say it is so much to build out something for a similar price then that's probably about right.  If one or two are substantially low or high compared to the majority then you could probably eliminate them from the running.  For conversations with tenants, get representation from a broker.  A broker worth their weight will spend adequate time helping to educate you.  If they don't have much time for you then go with someone else.

Hope this helps.  Good luck!

I have always liked Microsoft Project for its functionality.  If you need something more collaborative and like the SaaS model better, then you might consider Asana or Wrike.  I like Wrike better out of the two.  Good luck.

Johnny, 

Developers are like team leaders.  They bring together a team made up of lenders, builders, A&E professionals, investors (or just their own money), attorneys, real estate brokers, city planning department officials, etc.  Developers take on significant risk that the development will provide a desired rate of return and will be fairly compensated for the their risk exposure.

The contractor on the other hand provides a service.  They take the plans and build what the architect and engineers specify for a fee.  They also have risk that they have accurately estimated the costs it takes to build what is on the plans.  If so, they make a profit.  If not, they could lose a lot of money.  They should also be fairly compensated for their risk exposure.  

There are developers that are also builders.  

@Johnny L.  If I understand your question to me correctly my answer would be that you won't be sharing your profit margin with the GCs.  Therefore, they won't be raising their prices to keep up and eat up your profits.  They only bid on the plans.  Hope this helps. 

If your making a profit depends on others making less of a profit for themselves than the market allows for then I think you are approaching this in the wrong way.  You usually get what you pay for so if you find a low cost contractor then you will most likely receive low grade construction from an unexperienced contractor.  If multiple GCs are submitting similarly priced bids then it is reasonable to believe that is what it costs to build what on your plans.  So, if your due diligence doesn't indicate you will make a profit at those costs then its a bad deal for you and you should move on to something else that will be profitable.   Otherwise you have 2 choices to possibly make it work: 1) descope to lower the build cost (smaller overall footprint, less rooms, smaller kitchen, etc., or 2) value engineer your project by asking for lower grade finishes.