Calling all people in Development

yayaa's picture
Rank: Gorilla | banana points 509

For all that work at a development shop, can you give us some light on all the hats you wear.

How involved are you on the construction side? Do you work on bidding and coordinating with GC? Who checks up on the construction progress? How involved are you with communicating to the architect?

Also does your boss or the executive team have a background in construction? How involved are they in regards to the building aspect? Do they go on job sites and see the work done by GCs and speak with them on a weekly basis or this handed off to another team? Who is responsible for the actual project being built on time? Is there a project management team at most development/REPE shops?

Do you have third party construction/project managers or an in house team?

How involved are you with financing these projects? What are the typical provisions and standard Terms of a construction loan? When buying a development site, do you get a loan that funds the land cost and as well as 100% of the construction costs as well or do you have to draw down your equity in the project first? Can someone please inform me on the specifics of a construction loan and how it's gets paid? Is interest being accrued most of the time which gets capitalized when refinancing to a perm loan?

Last question - when you complete the project and it's going through lease up (e.g multifamily) how are you able to pay off your permanent loan since you don't have so much cash flow yet? Is there a specific loan for this scenario?

Thanks. I know there's a lot of questions but any insight would be appreciated.

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Comments (5)

Jan 10, 2019

I manage A to Z during the process. Sourcing deals, raising debt and equity, managing the architect (who holds contracts for all other consultants), and then monitoring construction and the GC. Undergrad is architecture/planning, then construction management work experience followed by MBA in real estate finance/PE. Now single point of responsibility for a high rise multifamily deal and a high rise office deal. The project manager if that's what you want to call me, is really the QB of the team or master herder of cats. You hire the best consultants you can afford, and keep everyone moving forward while keeping the objective in focus for all. Construction loans are refinanced after the building is stabilized. Perm loans are sized based on asset value. The proceeds on a stabilized asset > existing construction loan balance so the construction loan is "taken out" by the perm loan.

Most Helpful
Jan 11, 2019

This is a much better thread than the "property financials aren't financials!!!!!" thread. For that alone you get a SB. Also, development shops all seem to handle who is responsible for what during a project a bit differently, so you might get a lot of different answers here that are all correct. I'll provide mine.

yayaa:

For all that work at a development shop, can you give us some light on all the hats you wear.

We're pretty casual, but still no hats at work. Seriously though, as @cpgame said, being a development manager is being the quarterback. You call the play and execute, trusting your professionals to do their job but also knowing that they'll fuck up somehow and it'll be your job to both anticipate that shortcoming and react appropriately.

yayaa:

How involved are you on the construction side?

Very, or at least more than at the other development shop I worked at where their in-house construction management people handled 99% of on-site work. During construction, I'm on site formally for an OAC (Owner/Architect/Contractor meeting) every two weeks and often informally the weeks in between.

yayaa:

Do you work on bidding and coordinating with GC?

Yes - hand in hand with our in-house pre-construction (precon) team.

yayaa:

Who checks up on the construction progress?

The development team and the in-house construction management team. Both have different strengths and are looking at different things. Often, the earlier in construction it is, the more the construction management team speaks up. As it gets closer and closer to delivery, and aesthetics/punch are more important, the development team speaks up. Not always though.

yayaa:

How involved are you with communicating to the architect?

Directly. Weekly. Daily sometimes.

yayaa:

Also does your boss or the executive team have a background in construction?

My company is a partnership between two people and I am lucky to have one boss who takes the lead in financial and legal matters and another who takes the lead in construction and design. The construction/design boss ran construction and development for a very large and well known company for some time, so he usually knows more than the GC. It's useful.

yayaa:

How involved are they in regards to the building aspect?

Hah, too involved. We are regularly trying to get them to step away more but they love getting into the mix. They do this because they enjoy it, as annoying as that can be at times.

yayaa:

Do they go on job sites and see the work done by GCs and speak with them on a weekly basis or this handed off to another team?

It depends how confident they are in the project leadership team, how well the project is doing, and how close it is to the office. If they're coming every other week or chiming in on every decision, that's not a good sign for you.

yayaa:

Who is responsible for the actual project being built on time?

It's a team effort. Development Manager, VP of Development, VP of Construction Management, GC, and ultimately, the two owners.

yayaa:

Is there a project management team at most development/REPE shops?

Depends on how you define a "project management team." Not trying to be obtuse.

yayaa:

Do you have third party construction/project managers or an in house team

We use only third party GCs. I know TCR and some others do it in-house.

yayaa:

How involved are you with financing these projects?

Very, although the finance-minded partner usually takes the lead simply because it's more efficient - the equity and debt decision makers are his contacts after all. I know all of them and speak with them regularly though.

yayaa:

What are the typical provisions and standard Terms of a construction loan

Way too long to answer in detail, but interest only for X amount of time at a % of project cost.

yayaa:

When buying a development site, do you get a loan that funds the land cost and as well as 100% of the construction costs as well or do you have to draw down your equity in the project first?

Usually the bank likes equity to come before debt, but there are multiple ways to skin a cat.

yayaa:

Can someone please inform me on the specifics of a construction loan and how it's gets paid? Is interest being accrued most of the time which gets capitalized when refinancing to a perm loan?

It is an IO loan that gets paid from a debt service line item in the capital budget. This is one of the reasons why it is so important for a project to deliver on time - that debt service line item is calculated based on how long the construction period will last (or more accurately, until the project is cash flow positive). If you're late, or slow to lease up, you can run out of money quickly.

yayaa:

Last question - when you complete the project and it's going through lease up (e.g multifamily) how are you able to pay off your permanent loan since you don't have so much cash flow yet? Is there a specific loan for this scenario?

You're not on your permanent loan in lease up. If you budget correctly, you'll be able to pay your construction loan interest payments increasingly with cash flow, like this:

  • Month 1: 95% debt service, 5% cash flow
  • Month 2: 90% debt service, 10% cash flow
  • Month 3: 80% debt service, 20% cash flow

...and so on.

Others may be different, but in my company (multifamily), if we're putting permanent debt on an asset we either failed at something or the market has shifted dramatically. That thing is underwritten to sell. The buyer puts permanent debt on it.

yayaa:

Thanks. I know there's a lot of questions but any insight would be appreciated.

You got it. Keep going.

    • 14
Jan 16, 2019

@CRE you're the absolute man! That was truly a thorough response. Thanks for nailing every question on the head.

My last question for you would be:

Getting a little specific here - who chooses the architect you want to work with on the project? Do you have any say? Is it typically an architect you have used previously? I wonder how many quotes developers get when bidding the project to know that they are not, more or less, overpaying on architect fees. Thanks!

Jan 17, 2019
yayaa:

Getting a little specific here - who chooses the architect you want to work with on the project?

My bosses aka the owners of the company

yayaa:

Do you have any say?

I have marginal say, as do our equity partners. But at the end of the day, the owners make the call.

yayaa:

Is it typically an architect you have used previously? I wonder how many quotes developers get when bidding the project to know that they are not, more or less, overpaying on architect fees.

Probably 70% of the time it's someone we have used previously. Usually get 1-2 quotes per project, more for design though - not price.

    • 1
Jan 17, 2019