All Forum Posts by: Scott Choppin

We will be starting construction here in the next 2-3 weeks given our present schedule. We are working on two major task groups:

The make ready process, those items required to be in place to actually start construction. When we are at this stage it's always really important to be very vigilant regarding the list of items to make ready, and to be actively tracking them with your team (early this morning I sent a list of follow up items that I am tracking on this project to my partners in the deal and my team). The reason is the incredible amount of friction (a term you seen me use often) which are all those little things that stand in the way of starting. 

Examples would be permits, but I am really meaning more granular items in this stage: the paperwork that goes to the school district to sign off on payment of school fees, the county sewer connection application and fee payment, the public works department sign off on existing sewer location, on and on and on. This is where a great project manager really makes a difference (maybe that PM is you) to be constantly checking status on a million little processes. 

So here's what we are working on:

1. Building, grading, demolition, temporary power pole, and all other needed city permits. This includes numerous paperwork needed, such as special inspection certifications (who will do them), grading bonds, county sewer connection application, public works alley land dedication sign off, planning department sign off, fire department sign off, temp power pole permit application, etc.

2. Fee payments - school fees, county sewer fees, permit fees, development impact fees

3. Utility disconnection - in SoCal the timing for these can be very long, a few weeks in some cases, so you don't want to wait, be ready to start, and then find out your gas connection is still active, and no demolition can take place.

4. Asbestos Survey and AQMD Demolition Notification - required whether ACM (Asbestos Containing Material) is present or not. If present, you ASB removal contractor will prepare and submit. If no ACM, then demolition contractor submits. Requires a fee either way.

5. Site preparation - install temp power pole, stage const. office trailer, install site fencing, stage temp. toilet, install erosion control (straw waddles, silt fence, rock entry), install temp water, install site web camera.

The other major task group we are working on is the selection of subcontractors, and if warranted, a general contractor. 

The methods of running construction on a project like this are:

A. General Contractor model - hire a third party GC, let them run the construction.

B. CM Prime Subcontractor model - where the developer or ownership entity is the construction manager (but not a GC) and all subcontractors sign prime (direct) contracts with the owner. Sometimes the CM can be a third party, and not the developer. 

C. Owner General Contractor - developer holds a general contractors license and run the construction process in house. I sometimes call this the "Homebuilder" model, as most major homebuilders run their projects this way. 

In the last two models, it is critical to have built a network of subcontractors that are trustworthy and competent to deliver on budget and on schedule performance.

This is where I see a lot of folks new to the business have breakdowns, they either haven't or can't build their networks effectively - either general contractor or subcontractor networks. That's why you hear so many horror stories here on BP and in the market generally. And by the way, we experience it too. Sometimes generals or subs just fall apart, personal issues, financial issues, people get sick and unfortunately they die. These all effect human organizations, it's just more prevalent in the construction industry. As projects, generals, and subs get bigger, these issues tend to be less. But at the small and medium end of the construction markets you'll see this more often, and need to plan accordingly.

In my next post I'll layout ways to make assessments of generals and subcontractors to help avoid making the wrong choices.

Scott

Hi Everyone:

It's been quiet, as we have been in the midst of the plan check process with the city. While it has gone reasonably well, there are some lessons to pass on here. No matter how long I've been doing this, there's always some new twist and turn in the process.

For this project we ran into two issues:

1. The code changed this year, (beginning of 2017) from the 2013 code to the 2016 code. 

This is important because each time a code is updated, there will be changes in the requirements for the project that you, your team, or most likely your architect will have to deal with for the first time. In most cases, on simple projects, this doesn't put too much friction in the process. You can and should always anticipate, that in a code change year, that it will take longer to produce a set of plans, and that your design team will be under more pressure to produce plans on the same schedule. Because of course, as the developer driving the process, you want the plans produced in the exact same time period (or sooner) that the team did before. In a code change year, it's powerful to anticipate friction or breakdown, and plan around that. This is no ones fault particularly, as our project designs are similar from project to project. However, there is enough variation in the project plans, and more particularly, because we build in multiple cities, the additive complexity of new rules and different cities slows the process down. 

2. Codes are interpreted by your local city, and more particularly, by the building department and a specific person who is ultimately the senior responsible person at the city. In CA, we call this person the "chief building official". That person is the ultimate arbiter of code interpretations for a project. 

Why is this important? As you work in each city, they will interpret and apply the codes in different ways from other cities, and you may on occasion run into breakdowns related to how they apply the code. 

On this project, we wanted to fit 4 units on the site, with front and rear setbacks, with a specific unit type (town house, family unit), guest parking, common open space, driveway, trash enclosures, utility locations, and other site planning details. This drove an unusual need to design the unit layouts such that the units, that are attached in row (or were in the original design) side by side, needed to overlap each other in small ways. An example of this, is that in one unit, a bedroom on the second floor of one unit, cantilevered over the first floor garage on the unit next door. Now in most cases, as apartment units, this is not a big deal. In our case though, due to this overlap, the need for fire separation between units, and the fact that we had no living space on the ground floor, the city made the interpretation that there were multifamily units (normally what we want) AND that they required elevator access to all floors above the 1st floor (normally in a town house unit what we don't want). 

We've worked in Long Beach a long time, but this unit and project type (town house rental) has not been done in Long Beach for decades, and the new codes and new interpretations of the codes came to be important in a negative way. On single townhome units we DO NOT want to put an elevator in each unit, too expensive as you would expect. An alternative way to design the project, would be to put common upper floor walkways to the entrance of each unit (called "catwalks") and have all units served by just one elevator. But this was not at all our design intent, much less that our UTH project type, is highly sensitive to non-rent producing costs, and which we must avoid or eliminate. We spend time eliminating all costs that can be, to increase the efficiency of rent produced as a function of costs spent. We call this NOI/Cost, and we want the ratio to be as high as possible. This ratio calculates a dollar of NOI produced by dollars of cost to build.

So we went back and forth with the city, who hadn't seen a rental townhouse in many years (they've seen for-sale towns, but a different animal in many ways). We came up with the idea of separating the 4 units into two duplex units on the same lot. 

This resolved the elevator/catwalk issue, and actually created a nice common open space that was less so in the early design. It put some pressure on the unit design, but nothing that we couldn't get comfortable with and did not require any crazy construction solutions or costs.

I'll end this post here (GC selection next post shortly) and say:

Fundamentally you must always plan for a certain amount of friction on a development project. This is why the profit per project is higher in most cases than a value add apartment deal. More strategic knowledge, more friction, more risk, more profits. The better you anticipate the friction, plan for the friction, and underwrite your proformas with this factor, the better off you'll be. For new developers (and some veterans) surprise is the enemy.

Development deals are more complicated and have more moving parts to manage. I read and watch Grant Cardone as part of my competitive learning practices, and he had a really good way of looking at it, to paraphrase: Complexity is the enemy of profits, keep it simple. 

Of course you'll say, Scott why then do you do development deals, and I'll answer: Development requires a high degree of strategic knowledge, and can be highly profitable. It's a niche, and not everyone can or chooses to do it. This give us a competitive advantage. But we also want to simplify in every possible way the development offers that we make. This is why we created the UTH housing concept, to develop and build a very very simple yet in high demand residential product. We've eliminated parking podium/garages, complex structural design, reduced complexity in all design facets, systems, specifications, etc.

So we stay in the domain where we have a high amount of hard-to-obtain strategic knowledge (i.e. development) combined with a simplified residential product, delivered into a highly supply constrained market, to families that have a deep need for our housing offer. This is the formula that we have created that we believe will have a long term demand arc.

Scott

@Marlon Thomas

What did you end up doing to get into real estate development?

 Hi Pavan:

To start, I am very enthusiastic about modular/panelized home construction for the following reason (from a development perspective):

1. Time savings in construction cycles

2. Elimination of number of trade partners needed to complete project

3. Fits better with what I call our CM Prime construction model

4. Better quality due to being built in factory, rather than field constructed

5. Depending on type of modular (true modular or panelized) you can skip the plan check process at local city building department.

Disadvantages:

Cost - the modular industry has still not full resolved the cost differential to my satisfaction. While in many cases they are getting closer, you still must add the site costs, any remainder work where the modules are joined, exterior envelope completion (i.e. stucco or siding), and most importantly (in my own research) the process of craning the modules on site is EXTREMELY expensive. 

I'll give you an example, we had company that did modular consulting prepare an estimate for a three unit project of ours in SoCal. The price per s.f. of the module was around $110 psf, so that was an OK price. Then you add the site work, the siding completion, etc., and that added another $40 psf to the number. Then they added the shipping, crane cost, and setting the modules and it was $127,000 JUST FOR THE CRANE PROCESS!!!! So something like 25% of the entire cost of their product is in the shipping, and put the total cost PSF way over site built. 

Before the crane costs, the number was over our site build cost by a good margin but possibly acceptable given carry cost savings, after crane costs added, total breakdown in our considering this a viable method for our moderate income privately financed UTH housing offer.

They of course argue correctly that they can save us the interest cost with shorter construction delivery cycles, but the total cost PSF is so out of coherence with the market that interest carry savings cant' make up for the overages in modular costs. Therefore, we can't even consider it. 

Most of the projects we see using this are affordable housing projects that use city/state subsidies and therefore the developers aren't focused on efficiency of both cost and time. We met with a local nonprofit in Orange County, and their per door cost for construction was over 400k PER DOOR. That did not even include soft costs, interest, land, impact fees, etc. We are building our UTH at well below 400k TOTAL project costs per door. 

You might use modular where the site constraints dictate that site built is totally inefficient, and therefore the modular costs make sense: tight site access, hillside, need for fast construction that outweighs the need for cost, etc. But in a normal, non-rushed, regular flat square site development model, site built wins by a wide margin.

A mentor of mine says this: He has been through 5 cycles of major discussions about modular/panelized housing in his long and very successful career, and each time the start of the new trend is exciting and promising, and then he says it always ends with some major breakdown in cost, such as 127K crane costs for a 3 unit project. He has built something close to 27,000 units of MF housing, and not one has been a modular project. This just confirms for me that the technology and practices are not yet ready for major market usage. But, the residential construction domain is ripe for new methodology offers, just hasn't happend yet.

If they could resolve the costs issue, I would use this methodology almost exclusively for all the advantages above. 

Scott

@Pavan Sandhu

Give me a day or two on your question. 

Thanks!

@Sarah Lorenz

Great question. My answer is.....let me give you the methodology for determining the cost. 

Two reasons for doing it this way:

1. The general specifications for site development in CA vs. MI, and your local city/county are way different then anywhere/everywhere else. Different due to regional differences in the engineering specs for the utilities (i.e. one type of pipe spec for sewer in CA, another in MI), the road design, do they require you to build curb and gutter or do rolled curb, landscaping and parkway specs, etc. So I could tell you it's 50k per lot for land development and that's a good number here is CA, and a bad number in MI. 

2. Your site may have different characteristics than mine. You may have hills, I have a flat site. Yours has trees, mine doesn't. Yours has nesting owls, mine has Bluespotted butterflys. Yours has no blue line stream, mine does. On and on and on. Each situation will drive a different cost structure.

My methodology is to have a set of practices that takes these differences into account, a fundamental way of looking at a site development or building project and making a thorough and rigorous assessment, even when you don't know what's different. Think of it this way, the site on the east side of your city can and will be totally different from a site on the west side. Same city/county, same market, radically different cost structures. 

I want to get everyone thinking about how to fundamentally approach gathering costs for a specific task or project: such as how much for site development costs, how much to build each house, or the development impact fees required to be paid. Fundamental practice, an action of underwriting and gathering info on deal, a flexible, open and dynamic approach to the details in that particular deal. Fundamental system, flexible approach to details.

So I always approach it from a flexible perspective, meaning I don't assume a cost in one area is a cost in another area, they are probably different. But fundamentally I know these costs for land development always exist, in all markets at all times:

Land

Underground utilities, wet and dry

Mass grading

Roads, sidewalks, curb and gutter, signage

Drainage, i.e. the building of detention/retention basin, spillways, and/or underground drainage structures (usually under the street).

Development impact fees related to land (does not include the fees that you'll pay to build each house

Fees:

• Park fees
• Traffic fees
• Drainage basin/district fees
• Water basin/district fees
• ANY AND ALL OTHER FEES THAT EXIST (see below, ask and ask and ask) WHATEVER THEY MAY BE

Soft costs

Design and engineering costs

• Plan check fees for your final plat map and engineering plans
• Planning application fees if processing a zone change or general plan amendment
• Environmental studies, investigate endangered animals and plans
• Phase I, II, and III environmental studies, i.e. toxic and environmentally impact soils conditions

The most important thing to remember, is that this is and must be a flexible list, not fixed and objective. Always be looking for what's not on the list, what's left out, what's missing. That's usually where people get in trouble, the costs that were forgot/missed/didn't know about.

So you create a spreadsheet for your own internal use, and then call the folks who know these costs cold and begin you information and cost gathering. 

Using this checklist system, I could go into MI and do a relatively complete underwriting knowing nothing of the local requirement or costs structures. I would call land brokerages firms, civil engineering firms, the local city/county for fees, construction companies for utilities, road, sidewalks, grading, etc. In many markets, there are companies that specialize in the preparation of feasibility studies for land development costs. In some cases, land brokers may have this info from past deals that they worked on, but be careful. The data may be old, the broker may be BS'ing you (nothing like a low land development budget to make the high price for the land purchase look reasonable). Always, and I mean ALWAYS do your own independent analysis. I promise you it will save your butt.

One tactic I use is to always ask everyone you talk to: What am I missing? Is there anything I did NOT ask you about, a fee, a cost, a unique issues (soils type, water table, endangered birds/bees/bugs/lizards/owls, etc). 

This is not perfect solution, but the main issue folks run into is they don't ask enough people broadly, and then question these people enough deeply. 

Grind.....it......out. 

Ask a million questions, ask everyone, everywhere, all the time. If your driving people crazy with your questions, your on the right track but just getting started.

Scott

Hi:

@Gary F.

I did some checking, and the CITY of San Jose, where your site is located, does not have the owner restriction. While the COUNTY of Santa Clara does, you are in the city jurisdiction, and therefore you may develop the ADU with no owner occupancy requirements.

This is one of the tricky parts of moving into the ADU domain, it is now a real estate development move, with zoning interpretations, jurisdiction determinations, and other fun political and entitlement stuff. The City of SJ does require that you agree to "not sell the secondary unit" but you can't do that legally anyways without a subdivision process.

Here is their worksheet to check the requirements:

https://www.sanjoseca.gov/DocumentCenter/Home/View...

Take a look and let me know what questions you have.

Scott

@Edward Abel

Hi Edward, did you find someone to help you with with this?

Thanks 

Scott

@Howard Greisman

Howard, did you find someone to connect with?