All Forum Posts by: Scott Choppin

@Alyssa Healey

Great question. 

I have also observed that most duplex/triplex properties in DEN are sold as Bill suggests. But, I also observe that if you are the developer of the deal, you will be able to leave your sweat equity for managing the development process in the deal, and this might make the economics different versus a pure purchase of existing units. 

You will no doubt have to raise additional equity to hold it long term in a development scenario, but you need to do that during the build phase anyways. Then the question becomes, how much does your perm loan underwrite at, and how much equity does that require, and what's the net differential between development value/equity vs. new needed equity in perm phase.

So I'll give an example using cap rates (not real numbers):

Example 1 - buy existing (possibly a breakeven buy) at a 4.5% cap rate, with whatever rents, operating expenses and NOI, that generate the value on the deal and the purchase price.

Example 2 - develop the property, and if it's underwritten correctly, you produce a NOI/Cost ratio (the development cap rate) of 6%. If you assume that the sale cap rate in Ex. 1 is true, 4.5%, then you have produced a profit in the development deal, or said another way: 6% minus 4.5% = 1.5% value difference between build cost and sale revenue or profit.

To be clear, this is 1.5% of the entire value of the property (before everybody freaks on me, this is NOT 1.5% profit). Another way to calc this, take your NOI and divide by 1.5% and this would be your dollar profit.

You can now decide as follows:

A. Sell the projects, reap the NOI/1.5% value differential

B. Keep the project, leave the 1.5% value in the deal as equity, underwrite on the "as complete" value with a lender, and plug any equity difference in the deal.

Now, this does not mean the deal makes sense to sell or keep in the first place. 

You have to underwrite the whole deal, to make sure you achieve general economic feasibility, i.e. sale revenue less build cost = profit. You also have to analyze cash flow generally, is it enough for all the work of developing the project? And,  you need to calculate the return of equity from the cash flow, your "cash on cash". Is it enough for you/your investor to take the risk to do the deal (remember: someone also has to provide a completion guaranty to the const. lender). 

Also, I am giving you rental project numbers in this post, it may be likely that selling the unit as a duplex condo, can produce more on a per unit sale basis than a rental unit of the same size, it depends on how aggressive the condo buyer is, and how much rent you could get for that unit. My analysis above does not take these differences into account. But pull the comps for condo sales in new duplex units, and pull comps from newly build rental duplex, and if the condo prices are higher, generally you might build and sell as a condo. If your orientation is long term hold rental, you may choose to overlook this condo build vs. rental build, in order to keep the unit as a rental. 

Developing a deal is a hell of a lot of work, and the returns need to be sufficient to spend the time, energy, and money that you will need to, to do the deal. Sometimes it's enough, sometimes not.

So bottom line, developing a deal should generally produce additional value above a straight purchase (the 1.5% example value diff. above). This is the economic return for doing the extra work of acquire, build, rent, sell/lease. Those are all things above and beyond what you are required to do in a straight purchase. Not everyone can do that, and if you can, that value differential is yours for the taking.

~ Scott

@Johnny Quilenderino

Ok, thanks for the answers. 

Things to confirm:

1. Approvals from 2008, are they still active or "in place"? In most jurisdictions, entitlements, other than recorded subdivision maps, expire if permits were not pulled to build the approved project. Now to confuse the issue, sounds like the developer built 7 units out of the 24, so another question, did the 7 units become the "approval" and the 24 units is expired? Sounds to me, like the developer ditched the 24 units, built 7 apartments just to save the deal, now wants to sell the 24 unit project. You as the new developer must prove to yourself that the 24 units in fact is real and can be built without undue cost, time, and political risk.

I would ask to set up a meeting with the city planning department, have your broker and architect go with you, ask as many questions as you can about:

A. Is 24 unit approval expired, or in place? Was there a subdivision or condo map approved and recorded? Are all the subdivision map conditions met? Is there a subdivision bond in place?

B. What is the process to get building permits for the 24 units?

C. What's that planning approval and permit process timing look like, how long to get all the permits you need to build 24 units?

Fine having the broker run the numbers, but why don't you just set up a basic spreadsheet based on outline from my previous post and run the numbers yourself? Reason for this as follows: You control the input and make sure it's real, you can also explore scenarios to see if the deal work, i.e. 220k sales price doesn't work, what if we sold at 230k, would that work (make sure to check market will support you explored changed variables)? No deal I've put together ever stays static from the first underwriting, you are always updated, tweaking, exploring scenarios, until you are satisfied that the deal generally works, or is dead. Then once you are working on the deal, you'll continue to update the numbers to make sure you are tracking.

Good you are getting GC costs, but make sure you get all your soft costs, insurance, architect, CE, MEP/S, soils, environmental (Phase 1) if needed, condo map completion, dept. of real estate condo map sales process costs, etc.

My observation at this point is that my ability to guide you through the process via BP posts will be very limited. Our company does provide real estate development consulting services, send me a DM if we can be of further help.

Thanks! Happy Thanksgiving!

~ Scott Choppin

@Ike Ekeh

Thanks for your post here on BP. You have received some valuable answers here, and I'll add ours for your consideration. 

We are a pure real estate developer and development advisory company, in business for over 17 years, having developed over 1,600 units of housing and mixed use projects in the western US valued at over $900M of development value. 

Most importantly for your consideration, we have produced numerous entitled land deals, where we have acquired, entitled, and sold to both homebuilding and apartment development companies. Our work included all planning, political, and community interaction and management of the political process, hiring and management of the design team, hiring and management of the brokerage companies to sell the sites, and negotiation and successful sale of the projects. Over $200MM of our developed project value has been in land entitlements alone. 

An example, our last major land deal was the entitlement and sale of land for a 453 unit apartment project on 16 acres to Lennar's Multi-Family Communities Investment arm last year. This project was located in Westminster, CO. 

For you and your client, the main initial process is:

1. Identify the zoning characteristics, political environment, and real estate market demand parameters for each parcel.

With the wide variety of sites you delineate, there is a wide range of different development characteristics to research, design, entitle, and sell or build for each project. They will all have different political constraints as they are logically located in numerous different cities and political jurisdictions. 

Our company has worked in over 30 cities and all counties in Southern California, including LA, Orange, San Bernardino, Riverside, San Diego, Ventura, Santa Barbara, and San Luis Obispo counties.

2. Determine the right mix of real estate product type/types to develop on a particular site. Obtain empirical market data from the various brokerage companies that specialize in each particular product type in your design. Our company, because of our numerous land projects and sale of development projects, has relationships will all the major brokerage companies and brings those relationships to bear on each of our own development projects.

Our company has developed pure residential projects including multi-family rental, for-sale, and affordable housing. We have combined these residential types in mixed use projects including retail, office, and hotel uses. 

3. Hire and manage a design team, including architect, landscape architect, civil engineer, soils engineer, to produce the initial design concepts and schematic plans necessary to complete the entitlement process. We have relationships with most of the major design houses including: KTGY, Withee Malcomb, Architects Orange, Tom Cox, and William Hezmahalch. We have done projects with all of these architectural firms.

4. If major CEQA processing is required, such as a full Environmental Impact Report, hire and manage an environmental consulting company for the production of the EIR and all necessary CEQA documents required for the completion of the environmental review. This would include traffic engineering, biological consultant, archaeological consultant, and any and all consulting related to Army Corps of Engineers, and Federal and CA State Fish and Wildlife. This scenario is more likely on the larger parcels of land your client owns.

4. Determine market value based on direct proforma analysis, empirical research, broker conversations, and comparable analysis. 

5. Decide if a direct sale, land joint venture, partial sale of phases or product type (i.e sell commercial and build apartments) or a development scenario makes the most financial sense. Utilize direct proforma analysis to determine the most beneficial Internal Rate of Return between each scenario, and including owner risk tolerance, make final business plan decision.

6. If development is the selection, utilize proforma analysis and the schematic plans produced by the design team during the entitlement phase to introduce the project to institutional debt and equity sources for determination of underwriting criteria and to obtain initial terms sheets and commitment letters for financing. 

There is a ton more we can outline regarding details in Items 1-6, as well as, further actions beyond #6. 

You are welcome to review our website, located in the signature below. 

As well, you can review the numerous real estate development articles we have written here on BP, as well as, LinkedIn. The BP articles are located here: 

https://www.biggerpockets.com/blogs/9960-real-estate-development

Finally, we just wrote and posted an article about Land Development Underwriting today, located here:

https://www.biggerpockets.com/blogs/9960/68001-land-development-project-underwriting

If there is interest for further discussion, please feel free to send me a direct message here on BP if we can be an offer of help for you and your client's process of review and research. I am also reachable on LinkedIn, listed under Scott Choppin, Urban Pacific.

Thanks.

~ Scott Choppin 

@Marlon Thomas

Sounds like a good plan. If your going to be an agent and be in sales actively, I would HIGHLY recommend getting some serious sales training, look up a guy named Grant Cardone, he has killer sales training courses. I have "Sell or Be Sold" on my desk right here as I type, another "10X Rule" in my bag on the chair. Your brokerage company may offer sales training, take advantage, but keep going, go see Grant Cardone.

My view is do all that you can to expose yourself to as many of the aspects of the real estate process as possible. Ask a TON of questions, ask title, ask escrow, ask the lender, as the appraiser, ask other agents (just make sure they are taking care of you, and not steering you wrong to lessen competition). Ask the broker you work for, ask the home inspector, ask everyone everywhere all the time.

On your investment career path, sounds good also, although I would say that flips can lead to new builds more directly. Nothing wrong with commercial flips, but you build expertise in specific product types and you want to build new offers on your base of expertise, rather than branch out to a different product domain, i.e. residential vs. commercial. They're both good, you just want to build competence in a specific area, before moving to another.

~ Scott

@Johnny Quilenderino

Thanks for your question about the condo project. 

First, a couple of points of feedback. You are calling this "value add" but from your description, you would tear the houses down, so this is a development project. Value add would be if you rehabbed the houses and rented them or resold them, value add assumes upgrade to existing structures. Second, if you are tearing the houses down, then the 24 unit condo approval the developer obtained is a "condo approval" not a "condo conversion". Condo conversion would mean converting existing apartment units into for-sale condo units, again, with tearing the houses down this is a development project.

Questions:

1. Purchase price is 1.3MM for the land plus the condo approvals? Reason for asking, if luxury condos sell for 120k, then the 1.3M purchase price is 54k per door just for land, which is nearly 50% of your cost basis. This sounds very high. We like to underwrite land on for-sale homes and condos somewhere between 20% and 25% of revenue. So if you sold units at 120k, 20% would be 24k. Remember, you have to pay for land, const. costs, soft costs, interest carry on your loan, permit and development impact fees, your profit, and fit that all into 120k per door on the unit sale (BTW, 120k per unit walking distance from Chesapeake Bay sounds cheap, but I'm not familiar with the market).

2. Has the developer done any construction drawings beyond the condo approval?

3. Has the developer completed all the legal and technical parts of the subdivision for city of Norfolk or state of Virginia subdivision requirements?

4. Will the architect who did the design for the project approvals stay on board to do the CD's, and what is their charge for that design?

5. Have you run any numbers on the deal? I always run numbers very first thing, to see if the deal even works at all in the beginning. You'll have to ask around for hard costs and fees, but most land brokers in your area should have some guidance on this for sites that they've sold recently. You can also call local small and midsize GC's for their budget guidance on hard costs.

You can do a very simple proforma as follows:

Revenue from sales

Less 

Broker fees for condo sales, closing costs for unit sales, warranty costs for units sales

Land, closing costs for land, broker fees for land

Soft costs, architecture, civil eng, MEP/S engineering, soils report, Phase 1 if needed, developer insurance, prop. taxes during const., marketing, subdivision costs, HOA formation and reserves

Hard costs - GC contract costs, overhead, profit, insurance

Development impact fees, permit fees, school fees, park fees, etc.

Loan costs for const. loan, interest carry, loan fees, appraisal costs, lender legal, funds control

Developer fee

Equals (what's left) - developer profit, normally shared between equity investor and developer. 

6. Why is the developer selling? What's wrong with the project that they want to sell? Maybe nothing is wrong, but you ALWAYS want to ask yourself this question. What issues does the developer avoid if he sells to you? Permit issuance constraints/lottery, soft market, lack of const. loans or equity, condo defect liability (maybe more of a CA thing), or whatever else. You don't want to be the greater fool.

Get back with these answers and we can go to the next step.

~ Scott

@Ashvin Dewan

Thanks for the response and feedback. Look forward to following up from our call today.

~ Scott

@Ashvin Dewan

Thanks for your post.

A few questions to get oriented:

1. Where is this project located (just need the city)?

2. What type of project is it (industrial, commercial, multi-family, etc)

3. Is the developer small and local, or big and national?

4. Who established the land value at $3.0M? If you did, based on an appraisal or what valuation method?

5. Has the developer given you a proforma? 

If you are going to JV your land, you absolutely need to see the model, in fact, if you have it, or when you get it, make it generic, but maybe think about posting it here.

I am not trying to have you disclose proprietary info about you or your family. You cannot make an informed decision without underwriting the deal itself. The work to make sure their assumptions are correct goes beyond what we can do here on this post.

The proforma is the most important tool that we have to assess any project. When we propose land JV's we always show the total proforma underwriting.

Generically, you putting up 2/3 of the equity and getting 18% of the back end sounds low.

The items to underwrite in the model are:

Rents

Op Expenses

Soft costs and development impact fees

Const. costs

Timing (entitlements, construction, lease up, etc)

Rates and terms on debt (your land will set behind the lenders encumbrance)

Developer fee deferral if any

Developer fee true equity

Development cap rate or NOI/Cost

Assumed exit cap rate

Let's stop there, there are a million more questions to be asked.

~ Scott

@Kaleb Duncan

Reach out to 2-3 smaller GC's to ask this question, they are you best source of real time data. They'll tell you they need a full set of plans to bid accurately, but tell them you need "budget guidance for underwriting". 

~ Scott

Bump

Submit your deal - any deal - here for "underwriting", let's see how we can collaborate, review, comment, harass (kidding), and give input on your next up and coming development deal.

Scott