All Forum Posts by: David Friedman

Background:

Three friends of mine own adjacent commercial land in San Bernardino, CA. All together, its a little over 3 acres and we hope to build a mixed-use project with ground-floor retail and 3 - 4 stories of housing above. 2 of the property owners operate two separate restaurants on their lots and want me to tear down their old buildings and build them brand new restaurants as part of the development. They are being reasonable as far as what they value their properties at. I am trying to figure out my equity split for taking on the developer role of the project. I have experience developing retail and housing projects for my own company, but never for another group. I estimate this project will be around $30,000,000 to develop.

Questions:

What is a fair equity split if I complete the following development services for this group? Originally, I was thinking 30% equity for my development company based off of what a mentor told me, but I'm not sure if that makes sense.

• - Our team will be heavily involved in ensuring the project’s success through our established government, development vendor (Architects, engineers, GC, etc.) and tenant relationships
• - We will additionally identify and apply for any available grant funding that may offset the cost of the project for all involved parties
• - We will obtain contracts with any other necessary land owners that we deem necessary to the success of the project
• - We will supplement the project’s capital contributions as necessary through debt or equity offerings.
• - We will secure construction financing from a commercial bank and refinance once the asset is stabilized.

I would also like to invest in this project as a show of good faith, but I'm not sure how much or what is fair. I was originally thinking that I could invest $25,000 to assist in hiring the architect and creating the initial marketing package and then additional capital once the project had entitlements and construction permits.

Is there anything else that I should be thinking about? I have a good real estate attorney, but I'm not sure if this makes the most since as a JV, or GP/LP type of structure. I will also be asking the attorney for advice. If anybody knows of any attorneys who they would recommend for this type of project, I am very open. I want to get this development started on the right foot and having a solid contract that is understood by all parties makes the most sense as a starting point.

Thank you for your time and wisdom!

Quote from @Scott Mac:

Can this housing be for only one religion without being in violation of Fair Housing (???)

 Definitely not. They can rent a downstairs space to a Jewish Deli if they want, but they could not discriminate on the housing component.

Quote from @Mike Keyser:

@David Friedman sounds great.

SB isn't that far

 We own a coffee/boba shop in one of our commercial buildings

Let me know when you plan to visit and I'll show you around.

Our office is in Downtown San Bernardino. We primarily do commercial/residential property management and development. We are buying buildings and revitalizing the area. We are also working on developing an Ono Hawaiian Grill Drive-Thru right now! Come visit us and say hello.

@Drew Sygit Yes, a fee only relationship is probably the best set up for the long term. Less issues, they can control the property. I can make my money and be free of any “guilt.” I will most likely tell them a fee, ensure they have the capital and capabilities to get the project paid for and just make my money and move on. I will be very clear that I can’t spend 2 years of my life and my team’s life chasing an impossible project. I’ll report back after our first meeting.

Quote from @Vicky Nguyen:

Quote from @Young Ho Yoo:

San Bernardino is a decent area in the 400-500 range

 Hey Young, thank you for your recommendation. I looked into San Bernardino but people saying it has higher crime rate. If it is my first house, do you have a specific area in San Bernardino that is with safe neighborhoods? 

For the most part, anything above the 210 Fwy is a good area. That being said, San Bernardino overall is going through somewhat of a renaissance. If you are interested investing in San Bernardino, come visit our office in Downtown San Bernardino and I'd be happy to give you a tour and talk over coffee.

Talk to a commercial lender that specializes in construction loans. Ask them how they normally fund these types of deals and follow that path to a T. I have figured out that you need to structure your deals in a way that conventional lenders would be interested in them otherwise you will be stuck paying 8%+ for hard money all of your life.

@Paul H.

Very helpful defining the most viable partnership structure.

Can you expand on #4. regarding your statement: "... it may be too small on the buy and hold side to really get property management covered properly amongst other things being a bit smaller and new." Very interesting line of thought.

Are you saying 80 units is too small to hire a full-time property management employee and still make money for my company? What would be your ideal unit minimum to also make it financially feasible to make money with property management? Is there a minimum gross rental income a project needs to bring in to make it viable? For example, $2,000 per unit at a minimum of 100 units?

For example, if it only makes sense at 100 units, under what circumstances? Would you charge 6% of gross rent plus leasing fees?

I know I've just asked a lot of follow up questions, but your statements are extremely helpful in regards to that discussion that I will have with this religious organization. I've developed commercial retail property before, but never multifamily on this scale so I am learning a lot from you guys. Thank you!
 

@Scott Trench

Thank you very much for your insight.

1) I agree that any investors or lender is going to want it to be its own entity unless the religious organization brings all of the capital to the table.

2) Got it. Business deal. To take the risk and spend the 2 years making this come to fruition it has to be financially beneficial. The fact that I get to help the organization is a side-benefit.

3) As the deal sponsor, I agree. Control is going to be everything if we are to make this successful for our company.

Scaling my company has been an interesting adventure over the past 5 years.

My current team consists of:

An Accountant (My father), Property Manager (New hire this year), Office Manager (Day to day book keeping, compliance, TC, etc.), and a Content Creator (New hire this year)..

We decided about 5 years ago that we wanted to transition from flipping to developing, buying and holding larger commercial properties (5+ residential and multi-unit commercial). We've had several mentors and we have positioned ourselves quite nicely although the learning curve was quite different than just fixing, flipping and selling.

Instead of thinking like a real estate agent, I've had to think more like a CEO and get the right butts in the right seats using an accountability chart. An accountability chart is similar to an organizational chart except an organizational chart is your existing team and an accountability chart is what you are looking for to scale to the next level of your company. Doing 1, 3 and 10 year planning to make sure that our team is all rowing this boat in the proper direction has helped tremendously. Organization and writing down all of our policies and procedures instead of operating off of "Tribal Knowledge" has been extremely helpful. Once we feel comfortable in our policies and procedures, training and expanding the team is going to be a breeze. It has already improved how we do things tremendously as we fill in the gaps in knowledge and procedure that we realized we've been missing.

Current bottlenecks that I see in my business for scaling and getting to the next stage will be:

1. Expanding to a larger office space to hire more employees and create more synergy in the office.

2. Firing myself from marketing and hiring on a marketing/sales team so that I can focus on development (This is the real estate agent in me that always wants to be marketing).

3. Expanding our property management team so that we can take on larger development projects.

My ultimate goal would be that I can focus on relationships/networking with government organizations so we can develop large projects, while my team supports the ongoing operations such as management and project management. I feel that I am 1 or 2 years away at max to being able to fire myself so I can fully work on my business and not in it.