All Forum Posts by: Scott Choppin

Share some project details if you can. 

Where in MX? Renderings?

Tim, we are building workforce BTR townhomes in California. Active on 6 projects, 337 units. 

Happy to help. Tell me what questions you have here, or we can set up a zoom call. 

DM if you want.

@Jonathan Orr

My 2 cents....for projects in CA, you're are already doing it correctly (i.e. your NorCal deal), getting time to complete entitlements. You will likely find SoCal sellers a tad more patient. For reference, we've had deals in escrow as long as 4 years (don't ask, affordable housing deal with tax credits, super complex) 

Like Jay and Greg, we never close without entitlements. We'll close without RTI plans, although we're having conversations with OZ capital sources that want ONLY RTI, which is tough to find deals that are in that state and priced coherently to generate a feasible yield.

On land loans, we used to do those (lol) but I haven't done one in many years, and likely never will, just too much that can go wrong and bad timing in entitlements. Possibly there's a story for buying entitled land with land loan, but again what if things go wrong in this complicated business. Plus, land loans are always too costly in my book, although for the correct reason of more risk on a land only purchase. Land lenders know this and take advantage of eager developers to take the leap imagining that things "will work out" and they won't get caught short on timing to close construction and repay land note. Not my gig. 

To us, California is a total pain in the *** for entitlements, but I also say that has advantages if done with good strategy and discipline. Once you do have the entitlements you have a very valuable scarce resource. We have sold 5 major land entitlement deals over the years (+10M land sale price per project) and have always made excellent profits (maybe better than actually building in my mind) but we always got time to entitle before closing.

Our solution now...only buy sites zoned correctly for our product type, get the time we need (mostly, not perfect) and negotiate escrow extensions that you pay to extend with non-refundable. If seller in too much in a hurry, let them find the "greater fool", and you can live to fight another day...the seasoned developer's mantra. 

~ Scott

@Akiem Jones

Great question, take a look at this long form thread (link below), it cover the entire development process of a 4-plex project in our hometown of Long Beach, CA. There is also a YT video series (search YT under my name) showing the physical construction process of the same project. 

https://www.biggerpockets.com/...

Let me know what questions come out of your research. 

~ Scott

In a previous posts, we described the site selection and project programming (design underwriting) process in a real estate development project. The next step in to check the zoning and see what you can build at that location.

We'll do this in two posts. In this first post I will show you how to search for what zone your site is in for a particular city or county. The next post will show you how to research what you can actually build once you know what zone your site is in.

Zoning is one of the more obscure aspects of the development process, but in our experience, once you acquire significant strategic knowledge and create practices around this research and identification process, the value and marginal utility to be generated can be very significant.

You can hire an architect to do this zoning research for you, but as a developer a big part of your "value add" is to identify strategically what areas have the zoning that you need, or where you found a site and the zoning works for what you want to build. An architect is best left to refine the research and the minute details of the zoning code, after you as the developer have found the site, identified the zoning, done the math to determine that the zoning density, site area, and unit count that work for your type of development project. Plus, you can do this much quicker then they can and you keep your predevelopment costs down by doing the work yourself. Ultimately, as a deal maker, you are in the best position to move first/move fast to find sites and and make initial zoning assessments that work for you as a developer.

Once you have identified a piece of land that is in the neighborhood that you are focused on, or found a site, you then want to research the zoning of the property.

Now, you may say: shouldn't you check zoning first and then find a site you want in that area? The answer is yes, but it can be done either way: find the zoning then the site, or find the site check the zoning.

If you are willing to farm an area with the correct zoning that's great, but in our experience with market ups and downs that are always part of our thinking and action as a developer, we want to focus on sites that are ready to transact. Maybe you find them on LoopNet, or the MLS and Zillow, or through your networks of help - brokers, bird dogs, wholesalers, etc. Either way, you want to be able to work on projects and land sites that can move forward with expediency. Either of these methods works, you just need to keep time to market in mind as you make this decision for yourself.

You have identified your site, now you want to check the zoning:

1. Find out what city it's located in. Be very careful to use mapping systems that have the correct data for what city or municipality the site is located in. Google Maps does not suffice for this, as a mailing address, or Gmap address may name a specific city, but it's jurisdictionally in another city or county.

Example:

This says city of Los Angeles, but it's really in the unincorporated county of Los Angeles.

This difference is critical, as all zoning regulations are specific to the city or county that your site is in, and every city's zoning codes are different. As well, the time to process entitlements (project approvals related to zoning and land use) may be significantly different. In this case, the county of Los Angles is notorious for being slow.

You can start with GMap search, then as part of your zoning check, you'll identify where the site in the city you have identified or selected.

2. Next, as you've identified the city or county that you believe the site is located in, you need to check the zoning (and by default if the site is in that actual city)

There are two main ways to do this:

1. Google search for this term "city of xxxxx zoning map". So for this example we'll use a random city in Orange County - the city of Stanton. Do the Google search and you will get this:

Here you'll see the city website, with a link to "General Plan-Land Use" where it lists in small print link text "Zoning Maps". Click on that and your see this:

Click on the link that says "Official Zoning Map" and you'll then see this:

Click on the image for link to actual zoning map

Then search for your site on this map. You'll have to cross reference streets named on the map and then find your site. The best way is to find the nearest major intersection actually listed on the map, then your street, then the outline of your site. It's tricky but can be done. If you determine that your site IS NOT on this map, then you need to move to the city that covers your site. In the sample map, you can see that they identify adjacent cites on the map, although not all zoning maps do this. Once you have determined that your site is on this map then you can move on to the next step.

Next, see what color the map is where your site is located and then look at the legend on the map to identify the zone your site is in. Let's pick the dark gold color for example purposes and you'll get "High Density Residential". This is your zoning designation for the site.

2. For larger cities or counties, some cities have GIS (Geographic Information Systems) websites or web portals. In the case of the county of Los Angeles it's called "Z-Net". In this case, you go to the website, and you'll usually see a search box where you can search by site address or Assessor Parcel Number and this brings up information on the site including the zoning.

3. You can call the city or county planning department and ask them what zone your site is in. In our experience, and in bigger cities, the planners almost never answer the phone. In smaller cities a phone call may work, or better yet, an in person "over the counter" visit to check zoning.

Sometime email works, but in any case, it's too slow for us. We want to be moving with velocity and be making assessments of sites rapidly. Both to be reviewing and assessing lots of site everyday, or a site may come on the market and you need to make assessments rapidly because your competitors are also looking at the sit

Part 2 will cover how to determine what is allowed to be built on your site given the present zoning.

~ Scott

Hi Ashley, nice to meet you here on BP. 

Your question is an important one for the beginning developer. How to get the most info needed for your decision making on a deal, yet not spend/lose significant amounts of money before you even have the deal.  

First, know what the market wants and why. 

This means that you want to design and build a product that fits the market, both renters of rental units, and the end buyers of your apartment projects if you are selling when complete assuming you will build and sell the units or the project. Do buyers love 2 bedroom rental units in your market? Don't design a project with a bunch of studios, etc. Do renters in a specific demographic love your town, but only want/can afford a certain whole dollar rental payment? Don't build something that's too expensive. You don't want to build a project or unit types that no one wants, and you get stuck. Now, if you want to build the units and hold them, you have more flexibility for what you think is right in the long term. But, you still want to build a coherent, feasible project for capital and lenders to be able to understand your offer. 

Second, as a new developer, you won't yet be able to look at a project and underwrite the design yourself. What I mean by underwrite design I'll give my own example. For our company, we only develop a specific type of townhouse style rental housing, and we know that these units layout at around 1,700 s.f. of land area per unit, or about 25 dwelling units per acre. So I can take a one acre flat square site and know generally we can fit 25 units on it. That's all we do upfront, we find the land opportunity, do some quick math (1 acre = 25 units) and run a model on those numbers. We also do light research on rents in the micro market the land is located in (although we generally know the rents from other recent projects). We know our build costs cold, we have historics on development impact fees, and get guidance from property managers on operating expenses, although we know those from historics also.

So you should be saying about know: "I don't know how to do any of this", and that's normal. Now here's where we'll try to open up a new space of possibility for your thinking: there is really no way to learn all of this (and I just touched on the surface above) real estate development knowledge, and execute on projects in real time. You will lose money and time on your first deals. Don't get me wrong, you can likely do this in the long term, but there is a lot to learn before you are competent to execute all on your own. Plus, working as a "lone ranger" is not the most powerful (strategic, competitive, and effective) way to work, two people working together is always more powerful than one person working as a "lone ranger". 

So here's what I recommend you do: You need to start building your networks of help in the real estate development space. 

The very first person to find is a mentor or developer to partner with on your first 1-5 deals, and have that be a way to learn fastest, lessen your personal risk, and share the cost burden that always come with underwriting new deals. Don't pick just anyone, you want to find someone who has integrity, is honest, actually does know what they are doing in the RED business, and wants to partner/teach with someone like yourself. 

Last, go here https://www.biggerpockets.com/... and read the article I wrote about "6 Ways To Build Your RED Career", there's a bunch more in there about how and where to learn, that won't lose you money in your early efforts to be a real estate developer. As an attorney once told me..."holy ****, now that I know what you do, real estate development is not for the faint of heart, I don't know how you do it, and not lose your mind on a daily basis"

~ Scott

@Ashley Mack

I'll get you a response later this week. 

Thanks!

Here's the next entry in our series of this lifecycle thread - Final Grading/Hardscape/Landscape - installation, layout, etc. 

You'll find it on the big video place....

Post question as you have them. Just a few more videos remaining.

~ Scott

Here's the next entry in our series of this lifecycle thread - Underground Utilities - installation, layout, etc. You'll find it on the big video place....

Post question as you have them. Just a few more videos remaining.

~ Scott

And this, before everyone jumps all over my **** about the formal definition of IRR

In response to some who said I had IRR wrong, with my explanation of why I wrote IRR they way I did in this 2-part series:

My goal was to write a simplified explanation of time preference of money and investments. A given return on investment received at a given time is worth more than the same return received at a later time, so the latter would yield a lower IRR than the former, if all other factors are equal."

Everyone can agree or disagree that IRR is the exactly perfect way to calculate investment returns, and in fact, those in academia, would correctly argue that using NPV to determine total value of investments is a better methodology. My writing here is for a practical, street level view of how to develop real estate projects, including raising capital from sophisticated equity investors. Understand: these guys use it to compare different projects, although the IRR is not the perfect mathematical tool for this comparison. But they overcome this weakness in IRR, by also using other measurements, which I wrote about - like equity multiple. You do not say if you have a finance degree or background, but you did not point out that IRR is not generally used only by itself. In RED project underwriting and assessments, equity multiples are needed to calculate the ratio of total dollar yields in a project given equity investment size, and further are indifferent to time periods of investment. When IRR and EM are used jointly, then an investor can better compare different projects with different time periods as potential investments.

Finally, I'll disagree with you on one last point specifically - the Reinvestment Assumption you reference as "reinvestment at maturity" is in fact incorrect. The reinvestment that is important is "reinvestment rate assumption that assumes that the company will reinvest cash inflows at the https://en.wikipedia.org/wiki/Internal_rate_of_return, specifically "The reinvestment debate".

Hope that helps from the point of view of practical RED project underwriting.

~ Scott