All Forum Posts by: Scott Choppin

Mani:

My goal was to write a simplified explanation of IRR for those who are looking to grow into, build their careers, learn, and eventually work in the practical real estate development world. It was not written as a defensive treatise in an academic setting.

You may have been able to read my bio, and would see there I actually do have a degree in finance, and more importantly, I personally have 20+ YEARS of professional proforma modeling experience with literally over 100,000 proforma models produced, many of which were underwritten by senior RED executives at the major corporations for which I worked. More importantly these proformas were submitted and vetted by some of the biggest equity investors in the RED business - companies such as Starwood, Prudential, Weyerhaeuser, and lenders such as Bank of America, US Bank, Wells Fargo, Union Bank, and many others. 

ALL of these groups not only accepted our analysis of IRR, they confirmed on all occasions how they used it to COMPARE different investments prospects of different time periods.

Per Wikipedia (see link below): "Speaking intuitively, IRR is designed to account for the 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 IRR's rate of return for the lifetime of the project" (emphasis mine). As well, I wrote in terms of "merchant building" RED projects, which as you know, do not pay out return of capital or return on capital until the project is sold, where there are no interim cash flows for which to make the reinvestment assumption, and there is only one final single payout. Last, an investor may include decision criteria for reinvestment AFTER repayment, but this would not apply to the subject project's IRR per se and is different then the "reinvestment assumption" you mention. See 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

@Julia Hwang @Amit M.

HOA is determined by a series of steps. A developer is required to hire a budget analysis company, that reviews the project and plans, and recommends a budget based on latest market info, amenities, product type, etc. In turn, that report is submitted to the CA State Dept. of Real Estate as part of the Subdivision Public Report Application (See guide here: http://dre.ca.gov/files/pdf/sprag.pdf). The developer has SOME latitude to negotiate what the HOA dues will be, but in my experience, not much. The state DRE has it's own staff that has some decent knowledge of HOA budgets. Additionally, the state and the consultants, saw many underfunded HOA's from the 2008-2011 recession period that were vastly under budgets on actual HOA costs, and so the days of low budget HOA's are gone. 

Finally, HOA costs are not a direct impact on housing costs, but they DO influence buyer's choice of housing purchase and price. Buyers are smart, they WILL take into account the costs of everything related to ownership of a unit. Same for projects that have Mello-Roos fees, a costs of bond-funded infrastructure improvements, that owners pay annually on their tax bill. If a project has an inordinately high HOA dues costs, we have seen it be a drag on the marketing and sales velocity and absorption rates.

~ Scott

@Ty Primers

I am not a fan of starting your career in construction or CM if you ultimately want to be a real estate developer. The two are definitely related, but those in the RED business from whom you'll seek RED jobs in the future don't see CM or field experience in that same light as being a PM on a development deal. Per @Kevin Keith Beck above, they are very different domains. 

In your case, either degree would be fine, just look for your first job to be in RED. Your background in either degree would be fine for an APM job at a RED company. Also, think hard about internships in RED, they are perfect to build your resume while still in school, see below for other guidance on building your career in RED:

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In my daily conversations and interactions online, I get the question almost daily of how to break into the real estate development business. Whether you are just deciding on your career, or are a seasoned veteran looking to make a move, this post was written to provide value in your efforts to build a career in the development business.

Get the right college degree

While there are many paths to a career in the real estate development business, one of the first things to do is focus on the right college degree. While being a developer does not require a degree, to get the right first job, does.

The following degrees are often in the background of those who have entered the business:

Civil Engineering

Architecture

Finance

Accounting

City and Urban Planning

Build your networks early

Build your networks early, either during college or once you enter the business. To build your networks, and facilitate choices for your first job (see below)

• Local industry networks, including local builders exchange, local and regional homebuilders association. An example in California is the Golden State Builders Exchange. Occasionally they will hold local mixer events, market updates, or hold monthly meetings.
• National industry networks, such as homebuilders and multi-family associations. Examples would be the National Multi-Housing Council or the National Association of Home Builders (usually affiliated with local HBA’s per above). Many of these national groups have regional student chapters. The national groups will hold annual meetings, and regional conferences.
• Attend local real estate meetups. While these are mostly made up on investors, these investors most likely know local developers. You can find meetup that are happening on a weekly basis in larger cities.
• Attended real estate conferences. An example in California, is the Pacific Coast Builders Conference. Search for your local or regional conference.

Your goal here is to meet as many people as you can, and gently let them know you are seeking a position with a real estate development company, and ask if they might know of anyone. A powerful way to approach anyone is the indirect approach: “Do you know of anyone who might be looking to hire or that is seeking an intern?”

Get the right first job

As a developer in training, you want a first 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. One word of caution, don't take a first job that is oriented around construction or construction management, I have found it very hard for folks to move from construction to development without some loss of career traction to do so.

For example, I come from a family of real estate developers, but I was ambitious to learn rapidly and work for others in the multi-family 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 assistant project manager, 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.

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.

To find companies, search in your local area:

Google search for news about company activities, company announcements, new projects, public hearings, phase releases (new units released to the market), new hires or promotions.

Google search and look for advertising for new projects selling or renting units and identify the developer.

Get a development internship

An alternative, if you are finding a job a challenge, offer yourself up as an 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.

Get a mentor

This is the single most important part of the advice in this article. A mentor could be someone you work for at a company, a senior project manager or VP of development. It could be someone you intern for, or just an individual that you have met and attracted into your network.

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. They can help you move up rapidly, and avoid pitfalls in your career. Development is a complicated business, the more knowledge you can acquire with more velocity improves your ability to increase your income.

Personally, 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 that was the best learning I ever did. I have made a point over my career to ask questions all the time, to everyone I can. You’ll learn to ask them professionally as you hone this practice. Be open to learning for your entire career, the speed of change in all markets today demand constant and never ending learning.

Give yourself plenty of time to build your career

One caveat, building your career will take some time. Development as I said before is a complicated and a risky business; there are many facets to what we do daily, and you want to give yourself the time to learn it thoroughly. Mistakes here can be truly costly. Think of Malcom Gladwell’s 10,000 hour principle, that it takes this amount of time to become “expert” at something.

Be ambitious, be strategic, move first, move fast, persist. 

@Marchelle Albritton

I get the question almost daily of how to break into the real estate development business. I put this together to hopefully provide value in your efforts to build a career in the development business. My orientation here is fundamental, meaning it can be applied in all situations. You'll decide for yourself what type of developer you want to be - commercial, residential, multifamily, etc. For me, a developer is someone who buys land and builds a new project on that land. 

6 Ways to Build Your Career as a Real Estate Developer

Get the right college degree

While there are many paths to a career in the real estate development business, one of the first things to do is focus on the right college degree. While being a developer does not require a degree, to get the right first job, does.

The following degrees are often in the background of those who have entered the business:

Civil Engineering

Architecture

Finance

Accounting

City and Urban Planning

Build your networks early

Build your networks early, either during college or once you enter the business. To build your networks, and facilitate choices for your first job (see below)

• Local industry networks, including local builders exchange, local and regional homebuilders association. An example in California is the Golden State Builders Exchange. Occasionally they will hold local mixer events, market updates, or hold monthly meetings.
• National industry networks, such as homebuilders and multi-family associations. Examples would be the National Multi-Housing Council or the National Association of Home Builders (usually affiliated with local HBA’s per above). Many of these national groups have regional student chapters. The national groups will hold annual meetings, and regional conferences.
• Attend local real estate meetups. While these are mostly made up on investors, these investors most likely know local developers. You can find meetup that are happening on a weekly basis in larger cities.
• Attended real estate conferences. An example in California, is the Pacific Coast Builders Conference. Search for your local or regional conference.

Your goal here is to meet as many people as you can, and gently let them know you are seeking a position with a real estate development company, and ask if they might know of anyone. A powerful way to approach anyone is the indirect approach: “Do you know of anyone who might be looking to hire or that is seeking an intern?”

Get the right first job

As a developer in training, you want a first 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. One word of caution, don't take a first job that is oriented around construction or construction management, I have found it very hard for folks to move from construction to development without some loss of career traction to do so.

For example, I come from a family of real estate developers, but I was ambitious to learn rapidly and work for others in the multi-family 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 assistant project manager, 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.

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.

To find companies, search in your local area:

Google search for news about company activities, company announcements, new projects, public hearings, phase releases (new units released to the market), new hires or promotions.

Google search and look for advertising for new projects selling or renting units and identify the developer.

Get a development internship

An alternative, if you are finding a job a challenge, offer yourself up as an 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.

Get a mentor

This is the single most important part of the advice in this article. A mentor could be someone you work for at a company, a senior project manager or VP of development. It could be someone you intern for, or just an individual that you have met and attracted into your network.

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. They can help you move up rapidly, and avoid pitfalls in your career. Development is a complicated business, the more knowledge you can acquire with more velocity improves your ability to increase your income.

Personally, 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 that was the best learning I ever did. I have made a point over my career to ask questions all the time, to everyone I can. You’ll learn to ask them professionally as you hone this practice. Be open to learning for your entire career, the speed of change in all markets today demand constant and never ending learning.

Give yourself plenty of time to build your career

One caveat, building your career will take some time. Development as I said before is a complicated and a risky business; there are many facets to what we do daily, and you want to give yourself the time to learn it thoroughly. Mistakes here can be truly costly. Think of Malcom Gladwell’s 10,000 hour principle, that it takes this amount of time to become “expert” at something.

Be ambitious, be strategic, move first, move fast, persist.

@Ty Primers

Hi Ty: This is a great question, and as you've seen from Jay and others, the development business is deep and complex. 

Take a look at this BP article that I wrote, that gives some guidance to building your career in the RED business

https://www.biggerpockets.com/blogs/9960/63926-6-w... 

Also, see this thread that walks through the complete lifecycle of a multi-family development deal in CA

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

Happy to answer questions in this post. 

~ Scott

I just can't help myself, no person can or should buy land without first working out a rough design and running a proforma. This RED industry is fraught with peril when you know what your doing, otherwise without experience, your bound to make major deposits in the "experience" bank account, i.e. losing money. 

Example: We are advisors on two major RED projects in SoCal, where the buyer, overseas money, purchased the land BEFORE they did rough design, assessed build costs, and ran a proforma. The overseas buyer is upside down in both their deals, one negative $600k, the other a whopping $3,000,000 negative Meaning each project is worth either 600k or 3M less when complete and rented than it cost to build it. 

So yes...you must "puzzle out" a proforma, how else do you know if the deals works? In my world of professional development, we never move on a deal before running a basic proforma, otherwise, you might work long and hard on a deal and it doesn't pencil. 

Never, and I mean never buy property unless and until you've assessed that it can produce sufficient financial returns to justify investment of time, energy, and money. I would council that all folks build their proforma first, inside the process of underwriting between 50 and 100 development deals (where you have no intention of doing the actual deal). It will probably kill those who are itching to go do a RED. For comparison, I started my career in RED working for a major apartment development company, where I ran literally thousands of proformas, for which, about 98% did NOT work. 

This advice will save you hundreds of thousands of dollars of lost due diligence and escrow deposit money. 

~ Scott

@Luis Gomez

For a basic ground up resi, you could use 150-175 psf. Those are numbers from smaller GC's on lower density basic residential. 

We are building our UTH multifamily projects at 125 psf, but it's apartment spec, no GC, direct to subcontractor markets. The price @Holly McDowell quotes sounds reasonable with pricing higher due to sloped site and adding architect and city fees in her example.

Happy to refer you to full service architect if needed.

Hi Everyone, I have been remiss in my posting consistency. We have been moving forward on Cedar even though my posts have not. The pace should pick back up now. 

Colin, depends on the zoning of your property. Check that out and post a reply here. We are focused on multi-family zoned properties for development in OZ's.