Differences in developing a 15 unit building versus a 50 unit building?
To all of the people who work in the development field, besides the larger TDC costs associated with a larger project (financing fees, broker fees, closing costs, etc.) what are the nuanced differences when trying to build a 10-15 unit multifamily building versus a 40-55 unit building? I am aware the equity portion required is larger, but how do the financing, project returns, investors, construction nuances, permitting, lease-up, floor plans, holding costs, and post stabilization (property management is a big one to address), etc. differ between the two project sizes? Does it make sense to just build larger if you can to achieve economies of scale or would you advise to start smaller to gain experience on how to construct the 15 unit building first, before jumping in the 50 range? The human instinct is that time is all we have and that the 15 unit project takes the same time to entitle and build as the 50 unit project anyway, so it makes sense to scale if you can.
Also, when does it make sense to get a GC on board for a project? How do smaller-sized firms justify the costs of a GC? I am assuming most builders don't have in-house GC capabilities, and therefore, need to sub this out. My question is how much should I budget for GC costs for a project with a TDC of 3 million? Does hiring a GC even make sense or does this deplete the entire profit margin? Any advice on my GC dilemma?
Thoughts?
Acquisition/Financing:
The major difference is the check size which may affect the financing process. At 15 Units, you could very well go to your local bank to finance it, but at 50 Units you may need to go to larger banks or maybe syndicate it since many banks may have limits on loan sizes like $20mm. Max leverage prob 65%-70% at 50 units so if you want to juice your returns and get 80% LTC you may need a layer of pref/mez. At 15 units you could prob get 75%-80% LTC from the bank.
Zoning/Entitlement:
Depends on your market, but in my market, this is prob where some of the biggest differences lie. Entitling 15 units is considered “small project” and will take 12-18 months to entitle. The entitlement process consists of 2-3 neighborhood meetings and getting some neighborhood associations on your side. 50 Units is considered “large project” and will take you 24-36 months to entitle. The community process is much more in depth. Will need to do things like traffic study reports. I’ve even heard of “shadow reports” that show how much of a shadow the building will create. Many more community meetings and need a lot of supporters, not just from the neighborhood, but district councilors, the mayor, and at this size, unions will want a piece of your sweet ass (this will drive your cost up which we’ll touch on later) and you will need their support to show that your project is a net benefit to the community and you are creating jobs.
Construction:
From the developers perspective, not much of a difference if you hired a GC who knows their shit. But for the GC, depends on your state, but more stringent building codes for 50 Units. For example, the building department will be a lot more strict about fire/life safety compliance and you will definitely need sprinklers etc..you will also trigger ADA accessibility codes so a certain # of units need to be ADA compliant and probably at the highest level of compliance (there’s 3 levels of how ADA friendly your ADA units need to be depending on size of building). You will definitely need an elevator at 50 units. In terms of actual construction you will probably need pilings for the foundation and sheering/shoring and if you are 6 stories or more you will need steel frame for at least the first floor. The more stories you have, the more floors that may need to be steel. This will increase your cost/SF
Budget:
More expensive per SF because of unions and steel construction. Also you may need to give more affordable units and pay higher project mitigation fees to the city
Sell-Out/Lease-UP:
Not a lot of differences here. The main difference is you will hire a more sophisticated sales team and maybe even hire someone in house at 50 units. There are larger brokerages that handle larger projects and do better marketing.
If you have the capabilities to build larger and make more money that justifies the added risk and work then yes…build larger lol. If I make $2mm at 15 units but $10mm at 50 units, then I’ll prob go with the 50 units If I can execute. Another difference is that your return metrics may differ at 15 vs 50 units. At 15 units you can expect higher return multiples and IRR because numbers are smaller and it’s less competitive. At 50 units multiples and IRR may be lower because it’s more competitive and takes longer and less leverage but your nominal profit should be A LOT more…if it’s not…then you’re doing something wrong or the project is bad.
As for when to hire a GC? Both…no way you are building 15 on your own unless you have like 10+ years experience as a GC. For 50 units you will almost always either hire a 3rd party GC or one in house, unless you are a GC firm yourself. Just like how there are different levels of developers who develop different size projects, so too are there for GC’s. Skanksa is a huge GC that prob only works on multi hundred million developments…you will never see Skanka GC a single family home just as you’ll never see a GC who constructs single family homes manage the construction of a 100 unit building. As for how are smaller project profitable with a GC? Find a project that has the profit margin to support a GC…if it doesn’t…then don’t do that project. Skanksa may be making millions per construction project, but the local GC building single families is probably happy making 200-300k/year across 2-3 projects
I forgot to answer about property management. You would just hire property management for 15 units or 50 units. Either you have a PM team in-house or you use a 3rd party PM service. For 15 units you would use a 3rd party PM service because 15 units doesn't justify hiring someone or you could manage the 15 yourself if you are handy enough and want to deal with the headache and want to save money. PM services will run you about 5% gross revenue (the more units you have, the more negotiating power) . Their services for that fee include managing rent collections, keeping track of accounting stuff, leasing up vacancies, and most important dealing with tenants. However, the 5% does NOT include repairs. Usually the PM service will have in-house handymen who will charge you per hour of repair work (in my market I've been quoted $50-$80/hr) and if the job is more technical such as plumbing/electrical/HVAC work, then they use plumbers/electricians/HVAC professionals either in-house or hire a 3rd party and send you the bill.
Love your posts, great content as always
Thanks!
Other issue is management, both for you but also who you’d sell it to. The latter is market specific - the smaller the market, the less interested someone would be in owning a 15 unit project. You end up in the weird middle zone between institutional buyers and retail buyers/smaller family offices. I’d look into condos for that size project, personally.
They are basically the same. Go bigger if you can--it is (generally speaking) the same amount of work for way more fees and potential promote upside on a nominal basis. The process to entitle, design, construct and lease a 20 unit project is the same as a 200 unit project. You will spend a similar amount of time and go through the same exercises. A bigger project generally has better economies of scale--better OPEX margin (for example, lower staffing costs per unit as they are fixed), better buying power on materials and labor, more qualified/experienced builders who operate at institutional scale, more conventional financing options, less bobo operators/consultants who only work in the small private space, etc.
You will pay higher broker fees as a percentage on a smaller deal. From a track record standpoint, it's probably easier to start smaller--but, if you have a good amount of experience a good deal/site can go a long way in terms of getting a deal capitalized for a developer with minimal track record.
Yes you should obviously hire a 3rd party GC if you are not a builder. You need to underwrite the deal and see if it makes sense, talk to several contractors to get a budget for your product type.
I have to respectfully disagree with Ricky Rosay here. 20 units vs 200 units is not the same. On paper, if you were to list out the steps then yes the process is very similar, but execution is VERY different and execution is what matters. This is sort of like saying running a 10 person start up is basically the same as running Facebook. On paper the steps may be very similar...but in reality it's very different. Anecdotally, I currently work at the sub-10 unit level and would be comfortable making the jump managing a 20 unit development process because I am currently working on entitling a 8 unit property and in my market, the process of entitling an 8 unit property is very similar to a 20 unit property...but I would be out of my depth on a 50 unit property because the city treats it differently from 20 units. If I entitled and developed a 20 unit property, then I'd be more comfortable jumping to 50+ units. I do agree that once you hit a certain level then each additional unit becomes less complicated. In my market, I place that at about 50 units. I think if you can develop 50 units, then 100 is basically the same. As you do larger and larger developments, the developer's job becomes more finance-oriented/institutional. Your job becomes more about financing and entitling the development and on paper it is easy to say "raise capital and hire the right zoning attorney...done," but in reality, these are major barriers to entry. Let's talk about financing first. On a 200 unit development that's like a $100mm+ development in my market...how the fuck do I even begin to finance that? At 80% LTC I need fucking $20mm...I can probably put up the entitled land as some of the equity...but I probably still need to come up with millions. Even if I had the equity, I'm not betting the farm on this project...so then I need to go out and raise a good chunk of equity. Sure I can hire CBRE to help me raise it, but we run into several problems. First, we have a chicken and egg problem...do you raise capital before you even have the land? How does that conversation work with CBRE? "Hey CBRE, I want to do a $100mm+ development, but I haven't found the piece of land yet and probably never will because finding land to develop 200 units is almost impossible...but anyways, can you go to your sponsors and ask them to put $20mm on the side for me?" Even if you find the land to develop 200 units, how are you financing the acquisition of it? Let's say the land is $10mm...by the time you raise capital for it, it's long gone. Second, an equity investor is going to look at you and ask you for your track record. When you tell them that you've only done a 20 unit development (and honestly, even a 20 unit development is fucking difficult to find and execute), it's game over. Third, getting the construction loan at 65% LTC and mez/pref for the remaining 15%, similarly to to raising the equity, the lender is going to ask for your track record...then they are going to ask for your balance sheet. Game Over. Lastly, how are you going to pay for the cost of carry on this project?? let's say you are 50% drawn down on the loan..$40mm @ 5% is $170k/month. So now you need an equity investor to not only put up the equity, balance sheet, and pay for the cost of carry? Good luck. Now let's talk about entitling. Entitling has more so to do with "who you know" to be honest. And I'm not saying you need to know the mayor (although it certainly helps), but you do need to know the right architects, zoning attorneys, and zoning consultants. These zoning attorneys/consultants know the mayor. On paper it's easy to say "oh just hire the right zoning attorney/consultant," but how do you know who the right attorney/consultant for the job is if you've never done this before? Or worse, what if you didn't even know that you even needed a zoning consultant. In my market, for a 20 unit development you need the right architect and and zoning attorney...but for 200 units there are 2-3 zoning consultant firms who have ex-politicians working for them. If you didn't know to hire these guys then sucks to suck. Also, how are you financing all the pre-construction costs such as architects, engineering, attorneys, consultants?
You don't just go from 20 units to 200 units (and everyone on this website thinks 20 units or even 8 units is small and unprofitable...maybe most of you guys are in the midwest where properties are much cheaper? Or everyone works for an institution where they only do $100mm+ TPC?) In my market I think 20 units is a big project (~$8-$10mm TPC with profit margin of ~$5mm-7mm)..even 8 units is pretty sizable and it's very difficult to find land to entitle 8 units...let alone 20 units). The progression of scaling in my opinion is more like 2-4 units -> 6-10 units ->15-25 units -> ~50 units ->100+ units
Nice, always fun to have differing perspectives. I think you make a good point about how raising the equity is a different ball game, that is definitely a major discrepancy...small deals can be personal developer funds while the larger institutional transactions generally require a combination of GP syndication/deferred development fee as GP contribution/heavier LP-GP splits like a 98-2 JV, which inherently requires much more capital sourcing time. But, don't you think the steps beyond that are pretty close mirror images? I would agree with your assertion that development responsibilities get more siloed at an institutional level, but only at public companies where you have too many bodies in the development department. Just my personal experience and opinion, but found that the 200-500 unit deals I run now follow the same execution process/steps as when we did much smaller projects.
agree with you Fred. Remarkable insights and thanks for the in depth responses. I owe you a DM one of these days. Seems like you are on par with my mindset. That’s for reassuring.
Unless it's for-sale product or it's rolling into a larger neighborhood portfolio I don't think it makes sense to build 15 units.
Even 40 I get it.
Why would it not make sense to build 15???
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