Unrealistic/Uninformed Bosses
Apologies in advance if this sounds arrogant/obnoxious. Hope it doesn't come across that way as I'm genuinely curious to hear what others think/would do.
I recently joined a family office that builds high-rise condo/rental product in a Tier 1 market as an Associate. We're redeveloping a portfolio of legacy lands that are owned by a group of private families (no mortgages on any of the projects and land cost of 0 in all proformas), so we're very well positioned given the current market environment. I work under an extremely well-educated Director who previously worked as a lawyer and has no previous RE investments/development experience prior to starting here.
Since joining, I've rebuilt the firm's proforma as the previous one was off by tens of millions at the bottom line (!!!!). I've also noticed there are a ton of unrealistic assumptions/expectations. I've suggested we rethink a lot of them, but have been met with fairly consistent resistance, despite providing back-up for all suggestions. A few examples are listed below:
- Rental revenues 20-25% higher than market averages of direct comps because "we're going to tailor the product to a specific market sub-set"
- Unrealistic expectations with respect to potential project partners required returns ("partners will enter this project for an IRR in the low teens and a 1.2x MOIC" despite most investors consistently having shown wanting something closer to 18% and 2.0x for nearly identical deals).
- Extremely aggressive exit cap assumptions for both market rental and rent-capped units.
- A general pattern of thinking of "we're going to do something fundamentally different to everyone else which will drive returns" despite our projects being nearly identical to the market standard/existing projects that are already occupying.
I'm not worried about our project's performance as given our land is at 0 and we're not paying interest. We're going to be fine on every deal, even if our assumptions are aggressive today. I'm worried about our current partners who are being given what I feel to be unrealistic expectations as to the profitability/viability of some of our sites. For example, we've communicated on our first site that they're set to earn an IRR in the high 40s and not have to pay anything out of pocket as their equity would be covered by an external partner given the land is so valuable. If I adjust the rents down to where the market is however, these partners would barely receive anything upfront and would be required to spend north of $10M out of pocket (note that the project would still perform well and they'd make money). The project would also not be as profitable, and we'd be required to put additional equity in as our loan size would be reduced.
I understand my place in the pecking order and don't want to rock to boat but it seems to me like we're being unrealistic with the current land owners and I don't see how this doesn't come back to bite us later. I'm curious as to how you would handle a similar situation? My Director, and the firm's VP, are very nice and intelligent people, but it seems to me like the lack of underwriting experience and unrealistic expectations/thought processes are going to put us in a precarious spot with our existing partners and create difficulties in advancing the projects.
Curious to hear what others think/would do. I'm not interested in leaving. I just want to be fair and reasonable to everyone that's invested while maintaining a good working relationship with my bosses/peers.
Based on the most helpful WSO content, here are some insights and suggestions for handling unrealistic or uninformed bosses in a real estate development context:
Key Issues Identified:
Potential Consequences:
Suggested Approaches:
1. Data-Driven Discussions:
2. Leverage External Opinions:
3. Focus on Long-Term Relationships:
4. Internal Education and Training:
5. Strategic Communication:
Conclusion:
Navigating unrealistic expectations in a development role requires a balance of data-driven arguments, strategic communication, and a focus on long-term relationships. By providing concrete evidence, leveraging external opinions, and emphasizing the importance of transparency and risk mitigation, you can help guide your team towards more realistic and sustainable project assumptions.
Sources: Life in Development - Expectations vs Reality, Life in Development - Expectations vs Reality, From Real Estate Finance to Founder of Development Company - Q&A, How many of you actually plan on going independent?
Bumping. Interesting predicament that I feel like a lot of people can relate to.
I am going to guess this all comes down to conflict(s) of interest somewhere along the lines. You mentioned it is a family office so in theory they shouldn’t be lying to themselves generate fee income but maybe they are selling a story to the people who own the land. Or maybe it’s a compensation structure or simply internal politics within driving the powers that be to generate absurd projections. The patriarch might not fund a deal penciling in a 15% IRR but if he actually achieves those returns people will probably still keep their jobs and get bonuses.
Given our land basis of 0, even at market assumptions we're still hovering around a 20% IRR. I'm more frustrated with the thought process/lack of knowledge that's driving a lot of our assumptions, despite having no reason to believe any of them will hold true and having current comps that directly refute a lot of what we're trying to push.
The fee comment is notable though. We're scheduled to collect a healthy DM fee on these projects (given how well they're forecasted to return, lol) so I imagine that also has something to do with it given the company is relatively young.
Some FO just love the tax benefits of RE and if they make a 7% IRR it's fine. This assumes there's an operating company where most of the net worth is and the RE portion is off to the side and not their main focus/money maker.
This seems fair and likely given what I have learned. I was at a FO for almost a year (all are different), but the point about executives with little to no decision making power wanting to keep their jobs are true.
They will look into and have stories for why we should do xyz because it's what a principal wanted. And when an MD asked the COO what our strategy is (after many months of work at the junior level) they said they did not know and it was still up in the air. They did not care that we were UW all these strategies and deals, putting together presentations - really moving no where career wise because of someone high up that couldn't decide yet.
At the end of the day there are very smart people, who are more senior and don't care about being ambitious or building something. They are fine living their life with a steady job, not rocking the boat. You as a junior, want realistic expectations and activity to learn and build something - but at the end of the day it seems it's "input this assumption because xyz says so" even if it's not market, because they are making the decisions and putting up the $ at the end of the day.
What is the landowner going to do when he finds out his return is merely market and not something wild? Make you move the building? There is no random upside in efficient market - he will learn
That’s a tough situation. I can’t give you a specific roadmap because I don’t know the ins and outs and whatnot of your job- but if you feel like there’s any chance that when this comes to roost you’re blamed b/c it’s your proforma… I would maybe gently speak up.
Anecdotally, so many acquisitions guys at shops that work off promote are cowboys. Whether they are wrong or right- a lot of people out there think the game is about raising the most money, winning the most deals, placing the most equity rather than trying to bat .1000. This may be simply be the goal here.
Fortunately, they've been understanding re my push back on all of these assumptions. It's a bit of an ongoing discussion, but the risk of them pointing the finger later on is very low - as far as I can tell anyways.
Further to my comment above, my read is that it's a management fee thing. If the project's profitability is communicated to be outrageously high to the partners, they'd be more open to paying management fees for us to get it there (they haven't been paying any fees aside from PM for the last few decades, so this is new to them). They don't need to place any equity - I think they're more focused on collecting fee revenue to further grow the business.
Yeah all makes sense. I’d echo CRE’s comment below in that case.
This is one of those learning opportunities of what not to do when you do your own deals one day. If you feel like you’re not being straight up with your partners, trust your gut. Write that down, remember it, and when you’re in charge don’t act like that.
In the meantime, it isn’t your money. Get your experience, get paid, and move on when the time is right.
What CRE said. Just roll with it. You can raise the issue and that is your job - but don’t always fight the ship. If you don’t like it and start getting paid on deal performance, you can leave.
Appreciate the input. Definitely noted for my future self.
More frustrated as the day-to-day for the time being (fighting with appraisers to get the value we've underwritten, convincing lenders our proforma makes sense, and negotiating with potential JV/LP partners to invest with us) will largely fall to me, and annoyed that I'll need to go to bat for unrealistic numbers.
Been there before. I would ask for details about how they plan to outperform comps and sell at cap rates that aren't justified. If that ends up going in a circle I'd say just do your job and dont let your comp be tied to your projects out performing pro forma.
Wow I thought i was arrogant lol.
I can appreciate how it might come across that way but I'm not trying to suggest I have it all figured out or that I should be running the business. I'm primarily concerned for the families that have owned this land for decades and are now being given bad information - myself and my career implications, in this context, are behind that.
I don't see an issue for you. What are the options?
1 - The people you work for are idiots, and genuinely believe what they're pitching. Fine. Guess what? If they can convince someone else, more power to them! This world is full of complete morons who have failed their way to the top. Taking the politics out of it, look at Donald Trump! The man is a complete failure as a businessman but is such a genius self-promoter that he's viewed as a success. So what if your boss is the same? You get the same experience, same paycheck, and won't be tarred with the same brush if the emperor is revealed to have no clothes
2 - The people you work for are basically crooks, and are lying to their partners. Again... how is this any different than half the people in this industry? Everyone makes aggressive assumptions sometimes, and in the absence of actual criminality, it isn't your problem.
If the landowners are honestly thinking they'll make 40% IRRs and not doing any diligence to vet that, then that is on them. Treat the whole experience as a lesson in greed and delusion, get your reps in, and move on.
You're not wrong in either suggestion and I agree with you on all counts.
These people are typically very progressive and I (might naively) believe to have good intentions. My management fee comment above is the only reason why I can see them relenting on acknowledging reality. As you mentioned, I'll be fine either way, but I want to do right by the people we work on behalf of while I'm here.
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