About
Hello everyone. Based on some recent comments in another thread, it looks like there is some interest in a dedicated conversation related to starting a new development shop and how to get there. Feel free to post them here. WSO has been a useful resource for me over the years, hopefully I can pay it forward.
Quick backstory: I left an institutional public development company a year ago to start a development shop with one partner. We have capitalized four live deals so far with total project costs totaling approx. $500M. Our target product type is multifamily, but we have a significant office pipeline as well.
The last question I saw was on investment strategy/thesis, specific to single vs. multiple product types. We are trying to focus on multifamily while selectively targeting office assignments in order to diversify our holdings and track record. We also expanded to a second market to diversify geographic risk and avoid getting pigeonholed as a company with single-market capabilities only. With respect to the office transactions, we have brought in an office development partner on two deals to help with execution. This gets our equity and lender partners significantly more comfortable with our ability to perform, and gives us the benefit of reducing workloads while expanding our office track record.
Let me know if you have any questions.
Mentoring
Want to work with me? Click here
Do you have true conviction in the fundamental value and long-term success of your deliveries or are you more incentivized by the prospect of cashing in and out while we're still on an upswing?
Most our current deals are OZ deals, so we will hold them on a long-term basis and are designing them to a higher quality/more durable spec. We are not taking a merchant builder approach, which is to build to as low of a basis as possible, stabilize, and sell for the highest margin.
I think this is best strategy long term; i) it allows you to build and be proud of the best product you can, which goes a long way to establishing a reputable brand; ii) patient capital means you are not subject to a specific market climate at a predetermined sale date, and can consequently wait for the best time to sell; and, the timing flexibility creates better alignment with capital partners=better long-term relationships.
Cool stuff. So what does capital stack / financing look like for your deals? Senior debt and what else? Where do you typically go to source equity and debt? Broker connections, direct outreach, etc.?
Capital stack is typically a 95-5 JV where we have a single LP come in for the 95% portion. My partner and I typically fund the GP portion ourselves; if it is a very large deal, we will syndicate the GP, again trying to minimize the number of investors (it's just a pain in the ass to coordinate in terms of time invested, money spent on attorneys, etc.). Both GP and LP are sourced 100% on relationships so far--my partner spends most of his time managing this process. We have only hired a broker to source the debt.
Debt is a construction loan at 60-65% LTC with a perm refi option contemplated post-stabilization. We haven't gotten too far on this piece as most of our projects are ground-up an we are not deep into construction just yet.
I am extraordinarily impressed by this. It probably would have been easier to just be merchant builders.
I also think this is a smart play, but what is "extraordinary" about taking a long term buy and hold approach?
Favorite thing about the OZ program is it forces LPs to be patient
Could you potentially provide some details on your decision process to go it on your own?
How did you become comfortable with this, when did you know it was the right time?
What was the fund raising process like?
At what point did you know your track record allowed you to make this jump?
Yes, track record. Bit of an ouchie for sure. Definitely less painful to build the track record on some solid deals independently while still working for the firm of allowed and time permitting.
What do you look for in a Lender?
How many years post undergrad did you work before going off on your own. In addition, from a financial standpoint how comfortable were you.
Eight years of post-undergrad experience. Comfortable financially--no kids, no debt, good safety fund. If this blows up for whatever reason, I think it is an "accretive" experience from a resume standpoint, so not worried about a future job.
How do you handle GP guarantees to your LP (for capital contributions), and to lenders?
Are you taking recourse construction financing? What terms are you seeing?
Who signs completion guaranty, environmental indemnity, and bad boy carve out guaranty? If your LP signs up for all of this for benefit of your partnership, what are you trading off to get them comfortable?
What guarantor entities are you putting up to satisfy lender liquidity / net worth requirements?
What fees do you bake into each deal beyond development management? Have you had any trouble getting your LP comfortable with paying said fees?
Good question. On most deals, we are securing non-recourse financing and jointly (GP/LP) signing limited guarantees: completion, bad boy carveouts, environmental imdemnities. We are having to pay our LPs a fee (up to 2% of their equity contribution) that gets capitalized into the deal to sign up with us on this and to flash their balance sheet to satisfy lender net worth and liquidity requirements, since we can't do it yet.
On one deal, we are signing up recourse financing with a full repayment guarantee; those rates appear to be ~210 bps lower than our non-recourse construction financing option on a roughly apples to apples deal.
In terms of fees--as sponsor we are typically charging a 4% development fee; a 2% asset management fee; intermittently a 1% (or frequently lower fixed) acquisition fee. We also capitalize our third party costs (accounting, construction management) into the deal which has not been problematic, since we have those functions third partied.
How did you go about finding & vetting your third-party costs?
Pretty good fees here. I’ve seen up to 5% for LP guarantees and less than 4% for more experienced development shops. Good for you
Thanks for the thread, really useful. A couple of stupid questions from me!
- How does paying the GP a % of their equity contribution that get capitalized into the deal encourage lenders to sign up please?
- What does 'to flash their balance sheet to satisfy lender net worth and liquidity requirements' mean please?
How did you and your business partner meet? How do both of your skillsets complement each other?
How difficult is it to obtain construction/permanent loans with favorable terms as a new developer?
What was an unexpected challenge you encountered when going out on your own?
Average amount of hours worked in a week? Do you work more now then when you worked at the institutional developer?
We met at the development company we were both working at before we split off. My partner, who is the founder of the company, is excellent at sourcing, relationship-building (capital partner relationships), and structuring deals at both the deal and GP/LP level. I am still learning the structuring component of the business but would like to consider myself very strong at the soup-to-nuts development execution component. We didn't really plan it, but fell into those roles naturally as our business progressed. I think we are also both really efficient with our time; we have had surprisingly few "strategy sessions" or higher-level thinking exercises where we are just kicking tires, and instead channel almost 100% of our energy trying to execute our existing deals and hunt new ones down.
Obtaining financing has not been a problem....again, presenting a united front with an LP has been sufficient, along with solid underwriting/business plan, to get it done. The most critical issue is satisfying net worth and liquidity requirements, which is a critical component of JV negotiations early. We have passed on certain capital providers who liked the deal but were unwilling to co-sign on the completion guaranty and/or use their corporate balance sheet to back up the financing instrument.
There are a few key challenges so far. The first is knowing that there is nobody else behind us to "figure it out." Whether it is a challenging deal-related problem or some kind of BS administrative task, there is no deeper bench to help execute as everything is on our shoulders. That can be daunting. The other is stress management. We are both working 70-80 hrs/week and traveling a lot, which is significantly more than we were used to. There is also a feeling of being able to unplug, as there is nobody behind us to pick up the slack. Still struggling with this one.
How complex is your predev zoning/platting? Upping these for anything or buying ready to roll?
Do you need an analyst?
+1 would love to be considered
PM me, we do.
How much cash did you and your partner have set aside when you started? Enough to comfortably tie up deals with deposits and fund initial DD costs before you get LPs involved?
Yes; those costs are 100% on us. We were stretched a little thin on initial deals; most involve earnest money deposits of $50-200K, plus DD/pursuit costs probably average $40K/deal. So, while the DD costs are really the only at-risk component (earnest money deposits are refundable if we pull out due to a DD issue or cannot find capital to fund), we still needed $500K+ of dry powder to be dangerous. In reality, that is closer to $1M as we have our overhead costs (salary, office, healthcare, payroll admin, etc.), start-up costs for our form JV docs ($250K+).
Do your “JV docs” get more involved than just an operating agreement?
How did you first get into real estate development? I'm trying to get in but not quite sure how. What experience do development firms look for as well? Thanks
I was a commercial office broker, and leveraged my experience in that discipline to getting a development analyst job at an office development company. I think there are a couple of main tracks: finance (capital markets/investment banking/acquisitions), and construction (CM, civil engineering, project management). At the end of the day, it is very difficult to get "development experience" without working directly for a developer. Job openings in development are very difficult to secure, mostly because of the low number of openings, and how infrequently they turn over. IMO the best way to get into development is to cold email/call developers, establish personal relationships with as many as you can, and stay on their radar by checking in frequently so you are top of mind when that opening arises. Word of mouth or direct referrals will get you the job 99 times out of 100 over a selectleaders or other online application.
You mention starting as an analyst...where did you leave off?
I see a lot of development opportunities in my state and cities, and I've been curious about how I can capitalize on that with 0 development experience. It seems that CM/civil engeneering/project management is the hardest part.... Which leads to the next question...
Did you and your partner have complementing experiences in the field or where you both something like finance guys who figured out the other stuff?
Congrats! You're never going to run out of pipeline either. ;D
I see in a previous reply you syndicate capital on a deal by deal basis. What does your typical equity split look like? Where did you raise your GP capital?
500MM in costs * 25% equity * 10% GP = 12.5MM in required capital which is a lot coming from a salary position in a public company. Just curious how people are putting together GP capital when they don't come from money and it doesn't sound like you started small either.
He was explaining that he and his partner defer fees. 500MM * 4% = $20MM of implied equity
What does that mean? ELI 5
Thanks for doing this AMA Rosay. I enjoy the value you bring to the RE forum. A couple of questions for you:
How did you know that you were cut out to be an entrepreneur vs staying on the institutional track and climbing the ranks?
Knowing what you know now would you have changed anything in regards to your career? Maybe starting in investment sales instead of leasing, etc?
Is being an entrepreneur all its cracked up to be?
I hated the concept of "paying my dues" at an institutional shop. The bigger the public company, the more your ascendancy of the ranks is dependent on your tenure at the firm, instead of how good you are at your job and the value that your work generates for the company. Every company seems to have this structure in some respect...searching for a pure merit-based opportunity was a big part of the sell for me, despite the risk. I'm also fortunate enough to be in a stable position with no debt, no kids, etc...felt like it might be my only chance to take a high-risk leap.
I wouldn't change anything. I think starting in investment sales or acquisitions would have certainly facilitated a quicker transition into development, but I met a lot close friends in brokerage who I would not have met otherwise. I also think brokerage gave me a lot of interesting perspectives that are still useful today.
I still don't think of myself as an entrepreneur, the structure has its positives and negatives like any other. I love the "just get it done," non-structured culture component...I can work out in the middle of the day, take trips whenever I want, etc. and just have to find the time to get things done when they need to be done. I love being able to quarterback the deals and think about what we can do to be different, create some unique pride of ownership, etc. But, the work is 24/7 and there really is not an "off" button. Maybe we are too small at the moment without sufficient team, but I would be too stressed out to check out for a week and go off the grid. That wears you down in faster cycles than I'm used to (I get burned out and need a mental reset of some kind almost every two weeks).
Great thread, thanks for doing it.
Can you provide a rough timeline for the pre-development portion of your deals? I'm with an LP and we don't participate in pre-dev costs so i'd like to get a better understanding of the process from land contract through ground breaking (i.e. design, entitlements, DD, GMP bids, etc.)
Have you had any issues with local politics? Bribe any City Councilmen yet?
Have you looked into bringing in a "fee guarantor" who doesn't put equity into the deal but signs the guarantees and puts their balance sheet on the line for a portion of Dev fee and promote? I've only seen this on 2 of the 50+ deals I've worked on, but i know it's an available option after you have a decent track record.
No problem. 1. We usually post between 1-3% of the PP for our earnest money deposits. On deals that require entitlements, we push for a deferred closing where the earnest money is at risk after DD (60-90 days), but we don't have to close for 6-12 months, depending on how much time we think we need to secure City approvals. All of our projects are a 50-50 split between us and LP on pre-development costs, which include due diligence; entitlements (attorneys' fees ($150K) and architect entitlement phase drawings ($25-60K depending on jurisdiction)). We also always try and push for full construction docs so we are not burning carry waiting for entitlements before we design the building. That portion is significant and can be another $750K. 2. No huge issues with local politics yet. We are mostly operating in development friendly communities. Saving the sponsored hookers and blow for a rainy day. 3. Great idea on the fee guarantor, we have heard that floated around a couple of times. So far, we've been able to structure deals with our existing capital partners that did not totally gouge us on the promote in exchange for balance sheet support. The fee guarantor guys usually want like 30% or more of the promote which is a lot if you can find a way to avoid it.
Are you focused on multifamily rental projects? Are you worried about the recent rebound in US homeownership rate, and increasing supply/construction? What cities do you think are more favorable for new multifamily developments(tier 1 vs 1.5~2)? Do you see any increase in dev costs? Which part of dev costs do you see the most increase in? (hard costs, soft costs, land or entitlement?) Thank you for doing this AMA!
We are primarily focused on market rate multifamily rental, yes. We are not worried about a rebounding homeownership rate...generally speaking, young adults have the lowest average savings profiles and highest relative consumer debt in history. The rental market is not going anywhere when people can't afford down payments for homes.
What does worry us is hard costs. Every time we reprice a deal costs are increasing. Hard cost inflation is over 5% per year in many markets, and there does not appear to be an end to that trend in sight. Hard costs generally comprise 65%+ of a total deal capitalization; when you twist the screws on an input that large, many deals can blow up and not pencil. That is especially problematic when you see inflation continue to press once you are fully pregnant on a deal (ie, already closed and knee deep).
We really like sunbelt cities with low state income tax rates, lower relative costs of living and high job growth: Phoenix, Dallas, Vegas, Austin, Nashville, Orlando). The combination of good weather, jobs, low cost of living, and a highly educated population are a big draw to those metros.
Would you consider modular construction to save on costs?
financially, at what point were you able to begin doing deals involving your own equity? was the threshold for you and your partner 200k, 400k, or more (liquid) to get your first deal up and running
I would estimate at least $500K for the founder. Legal JVA docs were probably $150K; earnest money deposit and pursuit dry cost powder for a single kickoff development deal are probably $150K; and implied salary costs for two people are anywhere from $150-$400K, depending on how much squeeze you are willing to absorb in early stages. Sourcing that kind of dry powder is definitely a significant hurdle.
Have you found the market for Opportunity Zone capital to be particularly liquid / attractive?
Seems like there’s a lot of talk about a surge of OZ capital looking for a home, but not as many deals being done that you would expect to see
Extremely liquid, and you are right. There is a ton of talk about OZ transactions, but much fewer sponsor groups actually doing them. On the capital side, there is a ton of money out there looking to place in OZ deals. But, in each city there are only so many good OZ sites that stand on their own (ie, that a project pro forma makes sense without the tax benefit piece), and far more crap. I think the OZ program has a runway of maybe another 12-15 months before most of the good sites are tied up.
A couple of follow up questions:
Do you think that the path to entrepreneurship is quicker with development vs REPE?
I think I remember reading in one of your previous posts that you went to grad school for a MSRE. Did that delay you being financially able to break out on your own?
Where did you get a msre for 30k? Every program I look at is 2-3x that
georgetown
How many deals did you start with and how many do you have now? How do you pay for the deals after you run out of your own money, or do you always have some of your own money in it?
When I first started working after college, I always hear the word sweat equity and didn’t understand much of it, and now I’m basically only doing refi and acquisition and have limited exposure to construction deals. I am always under the impression that developers like yourself use up all or half of your own money to start one or two deals, but construction and lease take 2-3 years to complete. How do you pay yourself during those starting years when it’s just cost coming in and there’s no income?
We started with one and have six right now. We haven't run out of money...mostly because we had sufficient dry powder to keep roughly three going easily with personal capital, and are drawing on fees on one of the larger deals which is sufficient to keep up buoyant for the others.
Fee income is really how you stay afloat--primarily acquisition fee and development fee. Frequently, the development fee doesn't get paid until you start construction, so there may be an early deal period (6-12 months) where you are waiting for that money to start kicking.
We have a corporate project to project total fee incomes and their respective timing so we can budget for a contingency fund to pay for dead deal costs and build up a "new deal reserve" to slowly start backing out personal capital as we continue to grow.
Little granular, but mechanically how do your fees generally work? I assume that acquisition fee is baked into deal as (some of our all?) your equity contribution? What about development fee? I assume this is set as X% of development costs, then do you draw it down in equal portions over your development period? (eg. $100K fee, 20 month build -$5k/mo paid to you?) Do lenders allow you to include all of your fees in project costs when calculating LTV constraint?
You've mentioned dry powder of $500k plus, roughly how much personal funding before you felt comfortable enough to open your shop? How levered was your shop in your first couple of deals?
Thanks for doing this, very helpful. Don't think you've mentioned this yet, but are the projects all in the same city as you/your partner live? If not, how often do you do site visits? Not sure what the industry norm is. You mentioned you're the soup to nuts construction execution guy. Any tips/resources for learning the project management / construction side of things? As someone in REPE, the partner usually deals with those matters so I've had limited exposure
They are not in our home city. We travel a good amount, probably averaging to 1-2 days per road.
The project management piece just requires pure exposure. There really is no seminar, online module, or textbook to help you learn that piece. You have to find a way to get first-hand exposure to the ins-and-outs of entitlements, permitting, scheduling, construction pricing, financing, underwriting (including rent and OPEX comp analysis)...any individual exposure above will help you build towards the overall experience.
As Ricky Rosay mentioned, there's no replacing experience, but this Construction Management Specialization offered by Columbia University (via Coursera) was a great primer for me into the world of project management
Hi Ricky, thanks for the insight.
Could I pm you a few questions that I have about how you built your team and things to consider when building your own shop?
Thanks!
Why would you PM him about it when you could ask them here for the benefit of everyone?
Sure, here goes: Looking to build out the development arm at my shop (currently focused on value-add opportunities / repositions, long-term holds), have an interesting 30+ storey condo development opportunity and would need the person to stick handle the process and ensure that we aren't getting screwed.
I have a few questions regarding hiring / stick handing the process: I) Level of Seniority to Target? (Would assume Project Mgr/Development Mgr or more senior) II) Given the unclear comp package, what could I expect with regards to: a) Salary Range? b) Deal Participation / Year-end Bonus / Carry? III) What type of person should I target (seniors at more established shops that want to start their own thing, a smaller developer looking to get the chance at a big project, an MBA student with development experience, etc.)? Plan would be for them to be lead our shop where we would then JV with another developer to allow our shop to gain experience / actual contribute to the project.
Goals: a) break into / add developments to our wheelhouse b) generate cash flow in the door to continue building the team / shop, and c) not royally screw up this project.
I would love to hear how you built your core team and any advice / lessons you mighthave. Thanks a lot!
Sit expedita perferendis recusandae numquam eum quidem. Ut quaerat quos maiores sed molestiae labore. Libero magnam numquam illo non.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Facilis porro quasi enim voluptas. Ipsa rerum rerum eius.
Nobis fugit est qui ab ut sint. Cupiditate voluptatum quia explicabo natus excepturi aut laudantium. Voluptatem eum quidem deserunt adipisci consectetur.
Aliquid omnis minima vel aut rem eos et nisi. Hic qui suscipit nam iusto. Culpa placeat dolorem a iusto ea sit soluta exercitationem. Nisi recusandae quas aut et et et voluptates. Fugit voluptatibus eveniet sed molestiae.
Qui non accusantium voluptatem consequatur omnis. Provident eius eveniet et corporis saepe suscipit hic assumenda. Doloremque aut eveniet necessitatibus at ut neque eveniet. Voluptatem quo enim sed quae ut qui. Omnis deserunt est sunt ipsum. Provident voluptas nihil aliquid facere molestiae. Amet minus ad ea quo rerum sit deserunt.
Repellat dolor a perspiciatis error. Quaerat quasi assumenda et quia nulla consectetur exercitationem. Dolores aspernatur sit possimus at.
Temporibus ipsum rerum facilis vel fugit. Itaque cupiditate esse vitae minima tempora molestiae. Eum aut autem mollitia doloremque est quisquam accusamus.
Nemo est iusto non cumque. Et itaque quidem accusamus mollitia perspiciatis dignissimos.
Aliquam quis at quisquam aut neque. Enim voluptatem rerum qui aspernatur dolorem eos reprehenderit assumenda.
Sunt sed molestias quia est aspernatur. Repellat dolorum et a itaque sed ab. Sint et dicta quo est in. Illum sit accusantium iste aut beatae at eos sit. Non sit beatae exercitationem laborum voluptatem quia.