Starting a New Business. Looking for Advice.

[Daniel Flesher]

I am a licensed architect living and working in Philly. I have an idea for a business but wanted feedback from other investors to see if this is something that people would be interested in. I also wanted to look at the potential pit-falls that I might not see because of my inexperience in real-estate investing.

The basic model of the business is that I would purchase property, most often land, then create the zoning and building plans, and sell the pre-developed property to a real-estate developer, netting the difference .

The potential benefit to developers is a shorter turn around for their projects. They purchase the land and the architectural plans are already completed. I already work with a lot of developers so I am aware of zoning laws, what developers are looking for, etc. I can also crank out a building set on my own in roughly one month (anywhere from single family to six units). So in the time it takes for me to close, I can have the project ready to go back on the market.

The potential downsides to me are the closing costs on the property, buying/selling fees, carrying costs if it doesn't sell quickly, designing something that a potential buyer doesn't want to use and potentially limiting my buyer base by excluding non-developers from by buying pool (unless it's single family). So I have to pass these expenses on to the next buyer or let them eat into my profit (which in essence is my architectural fee).

I'm wondering how I should structure the business to limit my liability, and show as much "loss" on paper as possible to reduce my tax load.

My questions are:

Is there any business structure that would work best for this?

Does anyone else think this is a good idea? Would you buy from someone who is doing this?

Is there another opportunity I am missing, such as wholesaling if I can get the plans completed fast enough?

Are there other downsides I am missing?

Thank you all for your responses!

[Sean Walton]

Hi @Daniel Flesher it depends a lot on how hard it is to secure permits in Philly or where you choose to do this and how good you are at guessing what a developer wants to build.

In the SF bay area you don't even need to secure the building permit just having planning/zoning approval (entitlements) can add a huge amount of value to the land because of how long it can take to get these approvals. If you take it to the next step and get the building permit as an architect that actually opens you up to a lot more liability because it is your life safety and waterproofing details now on the plans. Not sure about the litigation rules in PA but in CA not entity can protect you from these. you are on the hook for construction defect litigation for 10+ years or whatever your state's statute of limitations. 

I would take a look at what Jonathan Segal FAIA has done in San Diego. He goes all the way through construction and holds his buildings as long as possible and only sells after the litigation period is over. If you do it right it is like BRRRR on steroids. He has a study at home program. It is good for inspiration but not great on concrete steps. One thing I learned from him it is much better to get paid rent from your building than architecture fees based on tax treatment and depreciation offsetting the income but that was prior to the new tax bill so that may have changed a little.

I would also check out this podcast Chris Porto is taking projects through entitlements in Oakland then selling them. He started by doing rehab flips https://itunes.apple.com/us/podcast/smart-growth-d...

as far as carrying costs and closing costs that may be mitigated by doing an options contract but you need to make sure you have enough time to get all the way through the level of permitting you want or a way to extend the contract.