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All Forum Posts by: Scott Choppin

Scott Choppin has started 10 posts and replied 225 times.

Post: Lifecycle of a CA Multi-Family Development Deal

Scott Choppin#4 Land & New Construction ContributorPosted
  • Real Estate Developer
  • Long Beach, CA
  • Posts 251
  • Votes 359

Thanks Fred (@Will F.) !!

Appreciate the positive feedback!! 

Post: Best Real Estate Development Resources and Blogs

Scott Choppin#4 Land & New Construction ContributorPosted
  • Real Estate Developer
  • Long Beach, CA
  • Posts 251
  • Votes 359

Hi Drew: 

You and I have communicated directly via DM, but I thought I might add an answer to your question above.

First, read through this thread we created on the RED process

https://www.biggerpockets.com/forums/44/topics/427...

This thread walks you through the entire front end of the RED (the rest will come as the project develops further). From you other posts, I understand you are working on your parents site, which can/may be a land development opportunity. The info on this thread about zoning research, and hiring a design team are discussed. I will caveat, that the RED process can be exceptionally complex, particularly in the Bay Area, where the growth politics are the most difficult you will ever encounter.

Second, take a look at our BP blog:

https://www.biggerpockets.com/blogs/9960-real-esta...

This has a number of articles on the basics, as well as, more complex subjects such as proforma modeling and project financial underwriting.

Third, here is a more general RED topics Q/A we created:

https://www.biggerpockets.com/forums/44/topics/491...

This has some land development Q/A in it, that may be of help in your situation. 

Feel free to reach out, as always I am an offer of help. By way of background, our company has developed over $900M dollars worth of development projects, including numerous major land development deals. Our last large land deal, we entitled land for 453 apartment units in Westminster, CO. The project was then joint ventured with Lennar's Multi-Family Communities Investment division. I have personally been in RED development since 1983 and my family in RED since 1960.

Take care.

Post: Apartment Financial Underwriting - A 2-part Series

Scott Choppin#4 Land & New Construction ContributorPosted
  • Real Estate Developer
  • Long Beach, CA
  • Posts 251
  • Votes 359

In a few recent conversations with different folks, it has come up how they are calculating financial performance on multi-family projects. And to be honest, I feel the need to generate a specific post on this, since in many of these conversations folks were mixing the financial ratios up between project types. Now, no one's going to die from this mix up, but it does speak to the identity of the person who is speaking the ratios. I am grounded that in all cases, investors, lenders, and land sellers will hold the person speaking in a different regard if they are accurate in their assessments of financial performance of real estate projects.

Generally, in the multi-family development and institutional level value-add markets, we use the following ratios:

NOI/Cost

Internal Rate of Return

Equity Multiple

Cash on Cash Equity Returns (ONLY on stabilized operations cash flow)

In Part 1 of a 2-part article, we'll delineate how to model an apartment project cashflow. Part 2 will delineate the calculation of the ratios.

Proforma Analysis

The basics of a financial model or “proforma” for a development project:

Income and Expense

Construction Period Cash Flow

Internal Rate of Return

Income and Expense Analysis

On apartment deal underwriting or financial analysis, we’ll first break it down very simply for you to gain an understanding of the fundamental components of income and expense analysis for an income producing property. Once you get that, you’ll be able to use it daily and effectively, then make it more complex as you get more seasoned in your underwriting skills. But as you underwrite deals, you will always be able to hold the basic structure in your mind, then work the details on each deal in a spreadsheet that you can easily build yourself.

Basic rental income and expense summary:

Rental Income from all units, also called Gross Income

Less Vacancy Factor (typically 5%)

Equals Gross Adjusted or Effective Gross Income (has various names, but this is what I call it)

Less Operating Expenses and Reserves

Equals Net Operating Income

This fundamental formula applies to all income producing properties, apartments, office, retail, self-storage, etc. Each component may have a different name, or be subject to slightly different allocation of cost (triple net office has the tenant pay most of the operating expenses and property taxes), but the bottom line number that we care about is Net Operating Income or NOI.

When you hear people talk about NOI, you'll know how that is defined (formula above). What it means is the amount of money or cash flow that is available to make the loan payment, and the amount of cash flow that can be used to value the property in a sale or refinance. Using this formula, combined with cap rates (see below), you can underwrite all types of income property investments.

Construction Cash Flow Analysis

This is the flow of expenditures during the construction period. This cash flow schedule is particular to a development project, as you will need to calculate the interest on borrowed funds and the preferred return paid on equity as a function of your construction period expenditures. A normal investment property doesn’t have major expenditures beyond the purchase, whereas a ground up development project has all the necessary expenditures to complete the units and lease them up.

The construction cash flow is nothing more than a spread of each construction cost line item over the specific time period of your construction schedule.

Generally, the time period of construction is derived during your initial due diligence and provided to you by your in-house construction team, or a third party general contractor. A rule of thumb is to always allow more time than you think to build. Unless, you are a production home builder constructing the same unit plan over and over again, a custom or one-off design can only be roughly assessed for total construction schedule. You always need to leave yourself extra time in your schedule. This can be for the normal friction of time loss due to city inspection delays, weather delays, RFI’s, and owner initiated plan changes. On the opposite end of the spectrum, you could assume significantly longer time periods for construction than your team indicates, but this will erode your financial returns due to overly conservative (meaning higher) amounts of interest carry and pref returns on equity. So you need to strike a balance, with some “cushion” to protect against normal friction.

Assessments of Value - Using Capitalization Rates

Once you have the NOI, you can then value the property using the Capitalization Rate or Cap Rate. These are market based assessments of value, that can then be used to underwrite your project. On a development deal (and on all "value add" deals) we have two cap rates:

1. Development cap rate, which is the NOI divided by the cost of the project, or NOI/Cost. When we speak, we say "NOI to Cost". This is what is used when running proformas to determine value at sale or refinance once the project is built out, leased up and producing income (or projecting these values during initial underwriting). This ratios is also used as a comparison tool for the market or what other development projects are producing with which we compete. You might say: "we are building to a 6% NOI/Cost, what are you building to?" or "the equity investor says they want a 7% minimum NOI/Cost, do our numbers meet that criteria?"

When an equity investor is making an assessment of your project, they will ask what is your NOI/Cost ratio (i.e. development cap rate). Example: Our Cedar project is producing somewhere over a 7.5% NOI/Cost. If other developers' project is producing a 7% ratio, our project is producing a superior offer or more NOI to each dollar of cost spent to produce that NOI.

2. Exit cap rate. This is the cap rate in the market upon sale of the project, that determines the value of project upon sale or refinance. This is derived by taking the NOI produced by your project and divide by the going cap rate gained from market research.

Example:

"Broker says that our project should sell at a 4.5% cap rate, our NOI is $100,000, so our value should $2.2M at sale" ($100,000 divided by .045 = $2,222,222).

Another way is that you actually sell at a price derived from a bidding process that you produce in the market, and then divide the sale price by the NOI to get the cap rate at sale: "Our sale price was $8.69M, our NOI was $400k, so our cap rate at sale was 4.6% ($8,690,000 divided by $400,000 = .046 or 4.6% cap rate)

The difference between the development cap rate (NOI/Cost) and the Exit Cap Rate is your development profit. Let's say you can develop to a 7.5% NOI/Cost and sell at a 4.5%. Your spread is 3%, which is the value you've produced as the developer. You may more simply say total sales prices less total project costs is your development profits, but I want you to see where we get the value for the sale or refinance first, then you can use that to subtract and calculate the profit. Of course, the market always dictates, so the more buyers you have bidding for your project the better the price you can demand. We always want to create an auction for our project when able. But the market sometimes goes against you, so you may not get an auction, or worst case, in a down market you may sell at an actual auction. But the main purpose of delineating cap rates here, is to understand the meaning of NOI in the creation and assessment of value for an income producing project.

Remember: when speaking with sophisticated investors, knowledge of these ratios and the ability to work them and speak them, will set you apart from the rest of the market.

Here is a sample proforma:

Proforma 

Construction Cash Flow Analysis

Internal Rate of Return Analysis

Post: Looking for best use extra lot on single family House

Scott Choppin#4 Land & New Construction ContributorPosted
  • Real Estate Developer
  • Long Beach, CA
  • Posts 251
  • Votes 359

@Mitchell Krotz

One point of clarification, on the "Low Risk" scenarios, where you would sell the land, I meant all the land sale scenarios to be after you split the two lots. All land sale scenarios assumed in my mind that you keep the parcel with the existing building. After I reread my post, wasn't quite clear as I'd like. 

Good luck!

Post: Pricing of Subdivision

Scott Choppin#4 Land & New Construction ContributorPosted
  • Real Estate Developer
  • Long Beach, CA
  • Posts 251
  • Votes 359

@Peter Wentworth

In your formula, you need to deduct the following additional costs:

1. Cost of lot/site improvements

2. Development impact fees

Normal formula for land development is called a "Residual Land Value" or RLV:

Market price per lot

Less site improvements (streets, curb/gutter/sidewalk, underground utilities, drainage, etc)

Less impact fees

Less soft costs (to design the site improvements)

Less other cost (brokerage fees, etc).

Developer profit may or may not be deducted from land, just depends on the builder, but if someone did that to me, I'd tell them their profit is in the homebuilding, but regional market differences drive this. All builders will look at it this way, at least the professionals will. 

Possibly you find a "greater fool" the pay you what you want/need to make your deal work, but you don't want to depend on that for your numbers to work. This is where "buy to make money" or "you make your money on the purchase" comes into play. You must buy this right, or risk holding the bag, when the lots don't sell for 150k. Also, check those lot sale prices for yourself, ask around for land brokers in the areas, that have knowledge of this site, or about lot sales generally. 

In some cases, you may do some of the upfront work yourself (say the site improvement plans), and deliver to the lot buyers the already completed site improvements plans, or do the site improvements yourself. In which case you would deduct those costs from the RLV but ADD to your profit calc: Your sale price to others - Your purchase price - your soft costs - less your site improvement costs = your profit. 

BUT... the profit you do want to generate is for you. Either in the form of cash profits or a free lot for your personal use. Don't do this ONLY to get the lot you want, you are taking risk, you should get paid profits to do that. I'm not saying you will, but you could lose on this deal. Buy it at a certain price but don't sell for 150k per lot, and you'll lose money.

Last thing, you have to ask yourself, what's the real reason the seller doesn't want to sell the lots individually. Oh I know what they TOLD you, but look at the deeper picture: Is there something they know that you don't, some problem, some government regulation or zoning that precludes the lot development from working, some environmental issue, anything that they could pass onto you as the new owner, that they don't want to deal with or risk they are trying to shift to a "greater fool" - don't be that guy. 

"Make your money on the buy" - Scott Choppin

~ Scott

Post: The Real Estate Development Business - ask/say anything

Scott Choppin#4 Land & New Construction ContributorPosted
  • Real Estate Developer
  • Long Beach, CA
  • Posts 251
  • Votes 359

@Pavan Sandhu

Pavan, let us know what you find out, I am always looking for new offers/technologies to save time/energy/money. 

Thanks!

Post: Opinions on Development

Scott Choppin#4 Land & New Construction ContributorPosted
  • Real Estate Developer
  • Long Beach, CA
  • Posts 251
  • Votes 359

@Chase Gochnauer

Looks good generally.

A few opinions/questions:

1. Watch the narrow/deep lots, not the best configuration for building homes.

2. Are the SFH lots correctly sized given competition in the marketplace, are your lots coherent with buyers of the lots (either builders or homeowners)?

3. Who exactly is your market, mostly builders, or sell to homeowners?

4. Can you sell the whole package at once to a builder? Best option, map the property, sell the whole thing, don't build anything.

5. Is there demand for the TH lots? Can you keep those lots, sell everything else, then build and rent the TH's for long term rental income?

6. Sounds like you already closed, do you have any Army Corps issues that came up in your due diligence, i.e. blue line streams? 

7. Any environmental/ecological issues? Wetlands? Rare birds, bees, lizards, nesting spotted white tipped owls?

8. From the topo, looks like you'll have a lot of mass grading, have you costed out the grading and does it pencil with what you can sell the lots for? Have you penciled infrastructure, same thing, does the cost work inside your financial feasibility model?

~ Scott

Post: Looking for best use extra lot on single family House

Scott Choppin#4 Land & New Construction ContributorPosted
  • Real Estate Developer
  • Long Beach, CA
  • Posts 251
  • Votes 359

@Mitchell Krotz

Hi Mitchell:

You have such a great opportunity here. There are a few opportunities here, depending on your risk tolerance, ability to execute on a new build scenario , what the land is zoned for, and if your present lender (if there is one, encumber both parcels):

Higher Risk/Zoned for SFH

  • - Split the lot from existing building parcel, build a new SFH, and sell it, keep the cash or pay down your basis in existing unit.
  • - Vice versa: sell the old unit, keep the new unit (easier/lower cost maintenance in rental scenario), keep the cash or pay down basis of new unit
  • - Split the lot from existing, build a new SFH, and rent it, hold long term

Splitting the lot (or un-tieing it as some call it), gives ability to sell units separately if needed, or to finance them separately with different lenders/banks if that is a better situation. Maybe one has a regular mortgage, the other has a HELOC for discretionary capital to do other deals. You can always encumber both lots with one loan at your discretion.

Higher Risk/Zoned for MFH

All the same scenarios above, just that you may be able to build more units on the vacant lot

Lower Risk Tactics

  • - Sell the land now as is, easiest, nothing to manage or build, just sell it. Will generate least amount of value. 
  • - Sell the land later, possible appreciation, still no build needed
  • - Sell the land now or later, with full set of architectural plans without permits, no build. Slight value add.
  • - Sell the land now or later, with full set of architectural plans, processed through city plan check (called RTI "Ready to issue" permit status). Still no build, value added with RTI plan and permits. More value add as compared to first two items this list.
  • - Use vacant parcel after untie, as collateral for new loans to do other deals, use the raw asset value. Wont' be able to get HELOC, as no lender will loan HELOC against raw land. Hard money lenders will be most likely for success, but will still need to search many, as raw land loans are always perceived as high risk by all lenders, commercial or private.

If this were my deal, I would maximize value by preparing plans, complete plan check/RTI process, and sell. Max value without need to build. We call this an "entitlement" deal, where you the developer do all the prep, plan check,/RTI ,but sell without building. Max value with no build scenario. As I have said in other posts, the most money we have ever made in real estate, was finding a great parcel of land, completing the zoning and planning process, preparing the maps/plats, then sell that package (land + approvals).

~ Scott

Post: Lifecycle of a CA Multi-Family Development Deal

Scott Choppin#4 Land & New Construction ContributorPosted
  • Real Estate Developer
  • Long Beach, CA
  • Posts 251
  • Votes 359

@Sarah Lorenz

Great question. The answer is both. In this case the architect came up with the idea of the "double duplex" (4 unit) idea. So all the credit goes to him.

In other cases, we'll collaborate on solutions to issues either generated by a particular site or how a city works. 

Example, we are working on a new project, a triplex in city of Los Angeles, where the adjacent property has a 10' driveway easement over the lot we are working on, which is 42' wide. So we have 32' to work with (we can also use the driveway for our cars). The architect and our team batted ideas around, tried some designs we used previously and would prefer to use always, call it our prototype. But the backup space for the garages, typical for our prototype unit where the garage is located on the bottom of the unit didn't work (not enough feet to meet parking code). Together we came up with a  design where the parking is at the back of the site instead. 

Bottom line, he holds the building codes, he and I hold the zoning code and the build methodologies, and our team holds the cost/feasibility. Not to say our architect is indifferent to costs, he absolutely is (and I remind him regularly!!). Your choice of consultants should help you with this, not hurt you. 

As the developer, our team and myself must always track and prioritize all design ideas/changes/solutions against cost/timing/profit. It's ultimately our and our investors bottom line, so we watch it closely!!

Post: Highlands Denver CO Duplex Build

Scott Choppin#4 Land & New Construction ContributorPosted
  • Real Estate Developer
  • Long Beach, CA
  • Posts 251
  • Votes 359

Hi Juan

First, nice work on the sales video, beautiful neighborhood, excellent drone shots. 

Second, please email me directly with pertinent info, may have investors that would consider Denver. 

Email: [email protected]

Thanks.