All Forum Posts by: Ryan McGowan

Joel, I mentioned the renderings as part of the entitlements. That is to say the architect should be considering highest and best use from day one.

I don't think he wants to run a restaurant. He just wants to get the ball rolling on getting one in, and be a part of the process. Ideally, a successful restaurant operator would be tenant, and they'd sign a 10 year lease or more. For them, they'll just be scaling up.

Also, signs are cheap and just used test the waters and see what kind of preleases they can get. The rendering may cost 1000, and the sign 500 to 1000. The entitlements, however, may cost 10s of thousands.

Once there's interest, things can be adapted to fit whatever tenants want, for instance combining two pads with 2000sf restaurants into one pad for a 4500sf restaurant. Then proceed with entitlements. Or, keep the entitlements flexible with land lease pads. That's assuming it's a strip center, of course.

A feasibility study is too detailed to get a tenant or land lease. That would be going into profit and loss based on a business plan, with labor costs, food costs, insurance, etc. The market study covers a wider umbrella describing a market in general.

I was thinking you had a building or land, and were looking for a restaurant to occupy it. I would talk to the property owners and mention that they should market their property for a restaurant, and you can help them do it. If they have land that is zoned for restaurants, then they will want to get entitlements at the least. Most restaurant owners are in the business of food service, not real estate development. If a restaurant is going to be built, it's going to start with a property owner wanting to build out their land.

Let's assume I have a property, and I want to get a restaurant on it. I would start with getting planning approval for developing the site. With that process, I'll have some renderings made, or at the least a colored site plan showing all the landscaping and units that will go on it. I would have that rendering/colored site plan printed on a sign, on the lot, with a description, available sq. ft., and a big, bold phone number. The rendering should take up almost the entire sign. The bigger the better.

Put that rendering on the cover of a 3-5 page brochure. Put the market research in there, a map showing the adjacent places that attract traffic, how far the competition is, photos of the theater, and anything else that motivates a potential tenant. If there is interest, get them to sign an NOI with the lease terms. The NOIs can be used to get investors to build the property.

Contact Brian Foley at Kiwi Construction. They do a lot of work all over the country, but especially in Colorado for the storage sector.

Brian Foley
www.kiwiconstruction.com/CONTACT_US.cfm

Call the West Coast office. I have his cell if you send me a message. (Posts filter phone numbers and emails.)

Have you talked to a planner? Get a feel for how likely they would allow the zone change. If you are adjacent to an area zoned to what you are proposing, and just moving a boundary on the zone map to encompass your lot, that's not hard. If the zoning is going to be an "island" of residential in a sea of commercial, it's not as likely. Texas may be different, and even one city to the next may be different. Talk to a civil engineer or architect that has done zone changes before in that city.

Other contingencies could be soils issues. Have a geotech engineer provide a recommendation. Tell him or her its for escrow.

Title issues. Many people go through escrow but don't read the title report. Read it. I had a project fall through partly because of a single document recorded with the property that voided a parking easement on the property next door if they ever changed use. Ask for the attachments from your title officer, and read them. If you have an ALTA survey done, all of the easements will be prepared in one map.

Drainage and flooding. Is it in the FEMA flood zone? Does the property drain adequately away from the structures? Is there a drainage course running within or adjacent to the property?

The zoning, soils, title, and drainage are the big four. Other issues might be legal access (just because there is a road doesn't mean it's on public land), utilities, boundary line issues, structural failures, mold, etc.

General Solicitation became legal in 2013 to accredited investors only. I've never heard of it being illegal to solicit individuals, but there are regulations about it, such as a maximum amount of funding, and the mix of accredited and nonaccredited investors. This is known as Regulation D exceptions to the SEC. If you keep the funding just under a million for a year, that places you in the most lax exemption for Regulation D, and you can solicit nonaccredited investors.

http://www.sec.gov/answers/rule504.htm

Investors normally want to be part owner. They are looking for a cap rate rather than a percentage, so you may be able to work a deal where you get more percentage ownership than the percentage you put in. The difference is justifiable because for the additional ownership, you are orchestrating the deal and hiring property management, etc. Find out what your cap rate is for this type of property in your market. Usually between 6-12%. Assuming 10%, someone investing 390k would expect to receive $39k/year. If the income is 400k/year, that would equate to about 10% ownership. So although they paid the 20% capital, they get 10% ownership. This works out for the investor because they are still making 10% on their investment.

Using this kind of structure, you could offer 75% to investors, and have no out-of-pocket expense, and no financing, which means less risk.

I didn't see the response until now. I'll have to check my notification settings.

The marketing study would be pretty generic since you don't know what type of specific brand would occupy the location. If you want to market to a specific brand, you could have it tailored to their demographic. I know In-N-Out pretty much just looks for roof tops within a specific radius. They don't even look at competition because there is so much brand loyalty. But traffic counts, people counts, and I would want to show some sort of index of places to eat vs. population, and then compare it to other areas. That could be a good selling point. It's not an exact science, but it should reflect solid, real data.

If you know what kind of tenant you want, approach them. I am putting together a pro forma for a new construction commercial building, and I have not hired an agent for the pre-leasing tenants. I knew a few businesses that were doing great in lousy locations that go month-to-month, and I just stopped in with some sales materials. The idea of getting the same rate or even a little higher, but having a location with great visibility and nicer building that would allow them to do more business made it a no-brainer. Yet they weren't scanning loopnet or asking brokers for space. They were just concentrating on running their ship. For them it was an opportunity that fell from the sky, and they took it. They didn't shop around, and they didn't compare with other locations, and I think I'll have all the tenants lined up before escrow will close.

But it does take your time to go to these places. However, you probably don't live and work in a biosphere, and have to get in your truck and go places on a daily basis. So when you are driving through town, make an extra stop by these places that could benefit by leasing from you. You could even stop in just to ask what they are paying for their lease out of curiosity. Naturally they are going to ask why you want to know. Just tell them you're buying the XYZ building, and want to get an idea of what the rates are. If they are interested, they will let you know without you asking. And if they aren't interested, they may know someone that is. Bring business cards.

I think you understand equity just fine, but maybe you're putting too much weight into it in terms of investments. As the saying goes, you can't eat equity. Not only does it not put food on the table, it IS arbitrary and speculative. An apple isn't "worth" anything unless someone is hungry. And the more hungry they are, the more it's worth. But if 10 people have apples, a hungry person could just go to the next person with an apple willing to sell it for less. That's why you must use comps. You need to see who's selling apples and for how much. The price will fluctuate with many factors. No one wants really old apples. And if there's a lot of apples for sell, then you won't sell yours unless you're selling it for less than everyone else.

As far as financing goes, the advantage isn't about equity. It's about cash flow. If you have $100,000 to spend, you can buy a $100,000 property that makes $10,000 a year. That's a 10% rate of return.

Or, you could buy 10 $100,000 properties at 10% down and pay off the loans in $8,000 payments per year, per property. Ouch! That's 80% of the rents! But... there's 10 of them now. So you net $2000 per property, which is $20,000 cash flow. Your rate of return doubled by using financing.

Even better, after the loan is up, you're making $100,000 in rents.

This is simplified, but it illustrates the advantage of leveraging. Of course, it adds risk and the riskier the purchase, the less you want to finance it. If you were investing on land that had a 20 year ground lease to Starbucks, I don't think you would need to worry about financing at all.

So who cares about equity?

I think I'm in the same boat as the original poster, as we are just looking into these sort of developments. So I'm too green to speak from experience. However, I've been looking deep into the ins and outs of senior living and I'll share some of what I have found.

There are several stages of care levels from fully independent living in age-restricted communities all the way to full medical care nursing homes. If you're talking about one large facility, (or any other, really) what I have seen is a very detailed pro forma done by companies that specialize in this particular field along with a pretty good market study of the area, and pretty solid assumptions. If it's a smaller building, you could probably get by without all that, though.

Having easy access to medical care is important. You will want to have regular transportation to a medical center. There is usually an RN on site.

Amenities are a must to make it marketable. It's very competitive and the market is full of giants with golf courses, aquatics, tennis courts, and lakes. If you can access cultural centers or some kind of retail by foot, that's a big plus.

Even if there is no medical care, there will be employees and it's not a passive investment for anyone that gets involved. The model is more like commercial property than residential. Whoever occupies the project is not looking at the purchase cost so much as their ROI.