All Forum Posts by: Scott Choppin

Hi Jessica:

My background includes the formation and management of a housing NP in southern California for around 5 years. That NP still exists, but I "retired" from participation to focus on other efforts.

A few questions:

1. You use the term "bond" for this deal, is it really a bond? Or possibly just a loan? 2.5MM of bond financing would be a very small bond, plus 8% is very high for an actual bond structure interest rate. If it is a bond, what kind of bond? Tax exempt, taxable, who was the issuer, etc.

2. What's the use of the building? You don't say specifically, but sounds like this may be their offices or used for their NP purpose.

3. You indicate "new zoning" but I would assume the new zoning would require a new (or change the existing) building to capture that new zoning. What's the old zoning and what's the new zoning. Does the present use fit with the new zoning?

4. Does the present loan allow for prepayment, or does it have a prepayment penalty? What's the remaining term of the loan, how many years left?

5. You indicate a value of 10MM, where does that value come from? Has anyone done an appraisal?

6. Are there any other restrictions on sale or refinance of the building? Are there any strings attached to the original loan? Example, did a local city or other granting agency help them purchase this building originally and required in the loan docs to not refi or not sell? Why did they buy this building in the first place, if they could not afford the payment to begin with?

A couple of things, a non-profit can sell any asset, there is no prohibition for transacting any asset by a non-profit. They just can't use the proceeds of the sale for anything other than their non-profit purpose for which the IRS granted them non-profit status. Even then there is some latitude for the use of the proceeds, but if they vary too much from the stated non-profit purpose, then they can still sell any asset, they just would pay taxes on it. My saying about non-profits is this: Non-profit does NOT mean NO profit. They can and are "profitable" in that they can buy for 2.5MM and sell for 10MM and make a profit. They just have to use that profit for their stated NP purpose, and not distribute it to their officers. They can donate it to another non-profit as you say, but this is normally done in a wind down situation, where the NP board determines it no longer makes sense to exist and any assets need to be distributed to another NP entity.

I would disagree that it does no good for them to own the assets. Asset ownership is great, that's why we are all hear on BP. You said yourself that the new zoning and it's location give it a value of $10MM. What I think you mean, is that this asset is not correctly structured for their budget, or they are living beyond their means of generating donation, grants, and other revenues such that they can afford the present payment.

Two scenarios seem to make most sense, refinance new loan to reduce payment, or sell and use proceeds to buyer lower cost building.

So the most likely scenario, would be to find a new lender, get an appraisal, have them make a new loan with a lower interest rate and lower the payment (that's what you indicate is preferred scenario). If this is best choice, they should look for other ways to help them make the payment, like sublease a portion of the building to generate revenue.

Or another scenario (this would be my choice as it puts lots of cash in the bank) would be to sell this building for 10MM, payoff the 2.5MM loan, capture 7.5MM in the bank, buy another less expensive building somewhere else, and keep the difference in the bank. Again, the extra proceeds from a sale (the profits) can be kept in the bank and as long as used to support their NP purpose are tax free!!

Answer those questions above and I would be happy to help with more answers.

Thanks.

@Audrey Ezeh

Hi Audrey, great question. Most developers use attorneys all over the US, so the answer is less to do with regional or competitive differences, and more to do with complexity of the deal, size of the land parcel, and sophistication of sellers. Many time we are purchasing from (or selling to) corporations that require attorney drafted PSA's, so when they require it, guess what, we require it too. Sometimes it's sales to high net worth individuals with need for transaction structures that go beyond simple promulgated forms, say tax motivated sale structures, or more complicated land joint venture structures. As well, sometimes it happens that you can't or don't trust a seller, so then we are inclined to maximize protection of our position in the deal legally. That's not what we prefer, but is an inherent part of the business. 

We do use simple forms all the time for smaller and simpler transactions. Just did this for one of our recent UTH projects (UTH are an affordable housing innovation from our company for the development of privately financed rental townhome projects that serve middle-income urban families). It happens that we knew the seller, so in that case, we were not so worried about protecting our position in the deal. 

Thanks!

@Marlon Thomas

I wrote this in another post, but here is a refresh (try searching for keywords, you may find your questions have already been addressed):

As a developer in training, you want a job that exposes you to the maximum amount of the development cycle with the maximum possible learning velocity (time and speed). You will need to learn all of these components of a development deal: land acquisition, site selection and sourcing, zoning and entitlements, architectural design management, deal underwriting, financing, construction, leasing, property management, and sale or asset management.

I would suggest working for companies that already develop the types of projects that you are ambitious to build in the future. For example, I come from a family of real estate developers, but I was ambitious to learn rapidly and work for others in the MF development domain, so I obtained my first job (asst. project manager) for a division of KB Home (Kaufman and Broad Multi-Housing) that developed in-house apartment projects. I started as a rookie APM, and left there as a seasoned senior project manager running the entire project myself from finding the land to putting the project into long term asset management phase. This gave me the exposure to all aspects of a development deal on multiple larger ground up development deals.

Search for companies in your local area: google search, look for ads that are selling or renting new projects and identify the developer, read news of company announcements, and most importantly, build your networks. Networks could be: local builders exchange, local and regional homebuilders association, search on websites for NAHB, NMHC, ULI, attend real estate meet-ups, attend real estate conferences. You're near Chicago, I speculate that there's a ton of space to build your networks in a large urban center like Chicago.

Your likely job title will be: assistant project manager, analyst, development associate.Whatever it is, you will be working for a more seasoned project manager or senior project manager. Know this: that person is worth their weight in gold, and can be the primary person that you run things past or ask questions as you move through your day. My best days, were when I would be tasked with managing a project (or part of it) and could at the end of the day ask a TON of questions about how to do it, what happened, what went wrong, what could be done better, and what could be done better than anyone else. I used to carpool home with a very seasoned PM, and we would be in the car together for 1-2 hours each day, and that poor guy got squeezed dry like a sponge by me for knowledge and information. He and I still laugh about it today, but damn that was the best learning I ever did.

One caveat, it will take some time. I spent over 5 years working for others, before deciding it was time to go out and form my own development company. You should more than likely work for a larger company, they have jobs that are specifically related to development, versus construction or some other non-development role.

An alternative could be that you intern for a small development company, with the express purpose of gaining development experience, or at least that's how you should communicate it to them. You may have to work for free or at low cost to the small company, as they will be very sensitive to cash flow and costs.

The development business is one of the most complicated businesses that I know of combined with risk in land markets, underwriting, financing, and construction. While each component part is not overly hard to understand, there's a ton of steps, and each step has risk embedded in it AND you are dealing with people all along the way: brokers, land sellers, planners, politicians, bankers, construction folks, renters, property managers, and buyers. So your ability to both understand the process better than anyone else AND to convince other people to go your way, agree to allow you to do your project, or support your project with investment, is of paramount importance.

If you want to see the process in action, see my thread about a real world example from our development portfolio.

I am an offer of help, feel free to reach out if needed with questions.

Thanks

Scott

Hi @Marlon Thomas

@Marlon Thomas@J Scott is correct on the 75/25 ratio. To get some insight into the development process, take a look at this thread I am writing, walking through an actual multi-family development project in SoCal: Life Cycle of a CA MF Development Project

I am an offer of help, feel free to post questions here or you can send DM. 

Thanks.

Land contracts, structures and strategies - Part 1

Now that we have covered proforma analysis, we can move to the next stage of a project, getting the land tied up, or under contract. Sometime people describe this process as putting the land or deal “into escrow”.

To start a few basic definitions and explanations:

Here, we will describe regional organization and structures and definitions from a California point of view.

Escrow: Escrow or escrow services are services provided by a company that acts as a neutral, third party, for handling documents and money that are required to be traded or transacted for the land to shift ownership or change hands from one party to another. Normally, escrow companies are licensed by a regional or state political body, like the state of California. Escrow fees are normally split equally or 50/50, but any split or no split can be negotiated as part of the purchase and sale agreement.

Title: Title companies provide insurance that protects against legal or other technical issues related to land ownership when you buy it. These types of issues might be encroachments, easements, legal or political covenants that affect land ownership. Normally, a seller will purchase or pay for the title insurance as part of the delivery of the land in the transaction. This point is negotiable. Generally, there are two levels of title insurance. First, what we call a “CLTA policy” or California Land Title Association. The other is called an “ALTA policy”, or American Land Title Association. The main difference is the criteria for putting the coverage in place, and the ATLA policy normally requires a survey. This survey, called an ALTA Survey, survey the properties for encroachments and other title issues. This survey will normally delineate the title exceptions show in Preliminary Title Report (PTR), and these need to match the actual title policy. They work together.

The PTR is normally received during the due diligence period, and once the transaction closes, you will receive the actual title policy, which is your insurance related to the land transaction. We’ll talk more about title review in the post on the due diligence process.

Letter of Intent (LOI): This is a deal memorandum or letter form that delineates the deal points for a potential offer. Most times, these are described as "non-binding", meaning that although the parties may negotiated an LOI, and sign it, the terms of the LOI are not legally binding unless and until a proper or complete purchase and sale agreement is drafted, signed, and submitted to escrow in order to open escrow.

We always use an LOI when possible, as it is a low cost way to negotiate terms of a potential sale. As well, we'll use it when the contract terms may be extra complicated. We almost always have an LOI when dealing with a professional seller, someone in the business of real estate or development. They typically understand the necessity of keeping the attorneys out of the negotiations until they're need to draft the PSA. We rarely get an LOI when dealing with less sophisticated sellers or real estate agents. They are not used to it, and normally see it as a hinderance, not a help. In that case, we'll use the CAR Vacant Land form or equal.

Purchase and sale agreement (PSA):

This can take a couple of different forms.

1. a promulgated, or standardized form can be used. This might come from you local state realtor association, for example in California, it’s the California Association of Realtors form (or CAR form). These can be for many different types of transactions, but we use the CAR Vacant Land contract typically. We do tend to make significant additions, alterations, or adjustments to the CAR contract form in the Addendum Section. This allows us to tailor the contract to our needs typically related to timing of due diligence and close of escrow related to governmental approvals or entitlements for our project.
2. The other way to provide a PSA is to have your attorney draft it, or you draft a form PSA prepared originally by an attorney. This would be used when dealing with a professional in the business, as they'll want the terms to be customized well beyond what a promulgated form can provide. As well, anyone in the business that deals with attorney drafted contracts, will know to anticipate what we call a "one-sided" PSA. This means that whomever drafted it, the seller or seller's' attorney, will try to make the contract favorable to their side. In our case, in our LOI, we use language in the LOI that indicates that WE will draft the contract, i.e. "such purchase and sale agreement shall be drafted on Buyer's form of contract" or something similar. I will say this, we are not typically comfortable making this move overtly. While there a thousands of small details in a complex PSA document, we don't like to make it so one-sided as to be egregious. Some folks do, we don't go to that level in that way we handle the drafting.

Side note: Regarding working with legal counsel. Many new or less sophisticated developers and real estate folks, don’t or aren’t able to keep their attorney's under control. What I mean by this is, that you as the developer, should always be observing your legal counsel to make sure they are both protecting your interest AND helping you to move the deal forward. Of course, we all know of attorneys under the old adage “deal killers”, but notwithstanding this common interpretation, for you to be effective, it becomes your job, if you want to close deals to manage the attorney so they don’t kill the deal. If they can’t do that, get a new attorney.

I have worked with both types over my career, and you will know the difference after working with a few different people and firms. The best case is a good balance between deal making and legal protection. There are certainly many ways to kill a deal over small and insignificant details. Part of my assessment of folks on other side of transactions is to assess their legal counsel and how well the other party manages their attorney. I have NO interest in fighting tooth and nail over non-critical legal details, we will just quit the deal and move to another. This is also the reason why you always want to keep a deep inventory of opportunities on the land side, so that when you do run into these types or any type of issue that causes you to spend inordinate amounts of time, energy, money, and lost opportunity, you can quit the deal. Same goes for when you sell your projects to new owners, make effective assessments of the other parties legal counsel.

Finally, sometimes you do get stuck with a difficult attorney on the other side, it does happen sometimes that you can’t avoid it. My best advice if to have a conversation with a principal on the other side of the transaction to see if they will manage their counsel. If they won’t, do your best to interact with that deal killer attorney as little as possible, and maximize the interaction with the principal without counsel.

There are different philosophies regarding getting a parcel of land into escrow.

1. Get the land tied up first, based on a very rough order of magnitude analysis of the deal, then get into the details of underwriting, due diligence, and early market analysis while your are negotiating the contract or during due diligence. In some cases, if you know what a typical deal can pay for land, then you can use that. Example: On past deals, you have run numbers on a duplex, and these deals have been able to pay 50k per door for land, and you make your offer based on this standard land value. In a highly competitive land market, you may need to do this to compete effectively.
2. Do the basic analysis, run the proforma, with some assumptions regarding rents, operating expense, build costs - all based on recent working knowledge of other similar deals, then make an offer based on that basic analysis.
3. Do all the research, pull rent comparable, sale comparables, prepare an initial site plan, speak with general contractors, and any other research that you might think is warranted to do at this point.

For us, we generally use #2 above, do a basic analysis using existing data. Where we orient, it to run numbers very quickly, as a litmus test on what we want to offer, then base our offer on that.

Next, Land Contracts - Part 2, where we'll discuss more contract details, escrow timing, etc. As well, we'll delineate alternative land transaction structures.

@Rafael Porter Thank you.

@Jay Hinrichs Thanks Jay! I really appreciate the kind words, very valuable coming from you with the great identity you have here on BP. I agree on financing being a hurdle. I do think that some folks here who have trusted equity and debt relationships may be able to move forward, but as my friend says "Development is not for the faint of heart". I always suggest folks partner up on new projects when they first enter into the development space.

@Martin Spielvogel Appreciate the vote of confidence and hope to deliver post that offer excellent help to you.

@Matt D. Thanks Matt!! Best thread is nice to hear.

@Account Closed R-3 is good zoning, although COLA is big and bureacratic, the city's zoning code is not afraid of density whatsoever compared to many other cities with very weak efforts to provide by-right zones that achieve density. 

Rashad Winston Take a look at our thread about the development process. http://www.biggerpockets.com/forums/44/topics/427144-lifecycle-of-a-ca-multi-family-development-deal I am an offer of help. Post any questions here or DM if prefer. Thanks Scott

Lauryn Meadows Hi Lauryn, check out the thread link below. While it is not complete, it does begin outlining the development process for you. http://www.biggerpockets.com/forums/44/topics/427144-lifecycle-of-a-ca-multi-family-development-deal I am an offer of help in the real estate development space. Feel free to ask questions here or DM if that works. Thanks.

@Frank S. @Cody L.@Ryan Terwilliger @Anthony Dooley

Frank, per your original question, I have been speaking to folks recently, where I have been describing that we are now in the "development" cycle of the market. 

In a down cycle, where prices are depressed and the psychology of the market is pessimistic, then values are down and below "replacement cost". This buying below replacement cost is a common term used in the media and is familiar to most.

In an up cycle, you are buying above replacement costs (think: construction or build costs for new construction). So if you are a buyer, you are paying market costs and buying above build/replacement costs. However, if you are the developer, then you are "buying" at cost (by creating value as the developer), if you hold the property. Or you can sell above cost for a one time profit. There is where new construction starts to have economic traction. This is not commonly spoken about, and not something most people hold in their thinking.

At this point, you have to decide if you want to take on the role of being a developer, and work to produce value above your build cost. 

I do agree with @Giovanni Isaksen's friend's assessment of the three dimensional model, although I am very optimistic that if you take the time to learn, the development model is achievable. I am not saying it's easy or simple, quite the opposite, but this is why there is value to be gained, if you have knowledge that others can't or won't acquire. It's a competitive advantage and marginal utility to understand and have knowledge of the development process. 

I have written a post on the Lifecycle of a Multi-Family project that could be useful for you in this process of acquiring strategic knowledge about development. 

I am an offer of help in this domain. Feel free to reach out or ask questions here on the post.

Thanks.

Thanks @Auria Styles!!