Best Path for RE Entrepreneur

I've been doing this for awhile at a REPE, investing in office, industrial, student housing, life sci, MHC, multi, portfolios, acquisitions, ground-up, pref, debt, equity, etc.  A few recent conversations have led me to believe that if you want to tee yourself up for the ability to break off on your own, one of the best paths is multi development. 

And here's why: 

• First, you're going to have to raise money. 
  • Multi is viewed by most as less risky, and endeared by HNW/F&F/country club types, so you're setting yourself up for success on the capital raising front. 
  • In a similar vein, the promotes / splits one can achieve raising money from HNW/F&F/country club types is far superior to what you can get from an institutional investor.  50 over an 8 seems common; had heard of even a few guys getting 50 over a 6 w/o a co-investment requirement... and then I learned of a group in PHX that gets 60 over a zero (and yes, that's even before the LPs capital is returned - bonkers)
  • Watching some friends split off, even if you get your hooks into a warehouse off-market, raising money is no cake walk.  Anything commercial will structurally have the need for capital calls, and that makes people nervous (TIs, LCs, etc.).  Obviously people raise money around other segments all the time, but my point is that it's not as easy as if you were going to raise apartment-related money.
• Secondly, finding deals is hard.  Hard period.  Try buying interesting marketed or non-marketed deals in commercial land (think non-distressed sectors) without having the capital raised and seems almost impossible.  Via development, there's less competition for land sites, and a higher propensity to contact a less sophisticated owner who may not understand the development viability of their site (say, you're buying a small neighborhood center but know that due to some zoning quirks you can redevelop into apartments).  If dislocation of information still exists in any corner of real estate, it's this - entitlement / paper development / zoning knowledge, etc.
• Third, everyone only talks about promotes / carry.  Yeah, if you can crush it and make a few million that's great, but discount that over a few year period and pay taxes and, sure, it's still meaningful, but unless you've somehow landed your hooks into a massive project where the gross profit is huge, you're probably not hanging up the cleats and fucking off to St. Barth's any time soon.  Lifeblood is fees - look at all the big Wall Street firms.  They can hardly pretend to still care about making opportunistic returns anymore.  See Starwood's recent multi-billion dollar opp. fund?  I found the presentation from some pension fund's website - their first fund was an impressive +20% but once they were able to structurally raise multi-bn funds (piggy backing on the track-record of their first, impressive fund), that ambition fell to the wayside and all their funds are low double digit (now, part of this is the reality that returns compress as you raise more money).  But, same goes for Fortress; same goes for Colony.  BX still makes strong returns on BREP but their entire focus in on BREIT now, which just has to make a 5% dividend.  Point is, you want to build an enterprise that has durable income - how does one do that?  Fees - and you can only maintain consistent fees if you have consistent (or growing) AuM.  So what does that mean for a fledging group?  I think what it means is that you don't want to have to be in the merchant building / investing business.  If you're finding deals, improving them and then selling to harvest IRR, then it's tough to ever build an asset base... but then again  you don't want to be in the business of buying core and doing a perpetual hold, or else you'll never make any promote.  That's where multi is unique:
  • As opposed to any old refi, the value-add from development is so great in MF (and supported by gov't-subsidized debt and low cap rates on appraisal) that I believe you can pull out most, if not all of, your initial equity by refinancing at stabilization.
  • In addition, based on my understanding, a developer's basis for new, class-a isn't far off of acquisition values for class-b - sure, there's a big delta between value for class-a and class-b, but that's not what I'm talking about, I'm juxtaposing the basis of a developer in class-a with the acquisition basis / value of class-b; so you can be invested in newer, better product for the same value as your friend who bought a woody walk-up.
  • As a result, it's easy to convince LPs to sign up for perpetual holds.  Invest with me, I'll develop the asset in 24mos, we'll refi, you get your money back, and we'll clip a CoC in the upper single digits (technically not calculable since equity has been repatriated, but let's say the YoC is 6-6.5% and 70% agency financing would let you get to ~9%).  It's a no-brainer.  In exchange for extending your capital for 24mos, Mr. LP, you get a perpetuity and while avoiding any tax inefficiencies.
  • Now you've got a set of happy LPs willing to finance your projects going forward and an asset base that increases for every deal you do, for the rest of your life.
  • As part of the refi, you crystalize your promote and either monetize it out of refi proceeds or take it in-kind by increasing your share of the venture by a certain percentage (e.g., dilute the LPs) - so you get some $ in the bank or you set yourself up for some juicy cash flow stream forever.  
    • I also forgot to mention how you can set yourself up for success by contributing land at a stepped-up basis into the deal, once you've gone through entitlements, etc.  As that's separately capitalized, you can probably even monetize a promote on that section of the deal, too (in cash or kind).

Anyways, these are my musings from a slow summer Friday, but would be interested to hear what other folks think.  Obviously this understates the effects of increasing land values (which shouldn't really be too surprising, that's beta risk that anyone in a cyclical business like real estate takes) and the limitations of having to be a local specialist (i.e., hard to go out and replicate in multiple markets, given they each have their own considerations, politics, zoning, etc.)