All Forum Posts by: Scott Krone

@Alex Jacobson - Are you looking to develop the property further, or make improvements that total 50% of the value of the land?  If the answer is no, then the benefits of the OZ will not apply to you.  OZ's were created to encourage investment in to the community.  That was defined as 50% of the value of the acquisition price.  

So, if the property is $100,000 and you spend $50,000 on improvements, then the equity from third party investors can qualify for the tax shelters created in the OZ with respect to their capital gains.  Those funds would have to be invested through a separate fund.  Think of an A to B to C relationship.  You can't invest your own money into a property you own.  That is an A to A relationship.  You also can't have relatives invest.  That is considered a disqualified investor.  A.  Your entity purchases the property.  B.  OZ fund.  C. Equity Investor invests into the fund, which in turn invests in your entity.

Hope that makes sense.

@Eric Don You have been doing great research and working through the numbers.  Buying and existing facility is a good place to start for your first ones.  Keep in mind, it will be a learning experience, so it is always better to try to buy one below market value than at a peak value.  $8.2mm is a large facility.  A few answers to your questions:

SBA loan at 35% and a second is due to the debenture.  The local CDC takes on the smaller loan for the SBA.  This allows the originating bank to lower their risk on the development when the carry the "second" loan.

With regard to development, there are a number of issues to take into consideration when dealing with new construction or expansion, water retention, impermeable site coverage, water supply and pressure (is there enough pressure in the water main to service fire suppression), electrical capacity (I know you mentioned solar, yet fire alarm panels and systems require 24/7 power, sewer connections, and zoning are some that come top of mind.

We just worked with a client that purchased a property to expand.  They wanted to add 16,000 sf of lockers.  They discovered after buying the property (and before we were involved), they could only add 4,000 sf of lockers, and were going to be required to add $400,000 of underground retention work for storm water.  We resolved the challenge by building 4,000 sf of lockers and adding concrete pier foundations for 12,000 sf of portable lockers.  The site was a long and narrow site with the existing lockers in the rear.  We had to coordinate not only the construction but also maintain access through the duration of construction.

Another point regarding a site manager being there a long time.  The payroll seems quite high.  Having proper systems in place to insure the books and records are accurate are critical.   When our colleagues take over a facility, they usually bring in new staff to insure the records are accurate.

 I can not speak to what the Market may or may not bear.  Ultimately, the way to best determine the answer to your question is to take it to the market and see what the response is.

@Colter DeVries - Like in life, I think the answer to your question is "depends". Most syndications are based upon a defined time frame in order to generate an attractive IRR based upon the risk level. The longer the hold the IRR declines or remains flat without a sale or refinance transaction.

If the goal is to generate a higher than market IRR, then "no".

If the goal is to reduce risk, pool resources (ie, equipment, horses, feed, etc) for greater buying power, than "perhaps" if the group wants a steady, consistent return.  It could be a similar model to a "co-op".

If the goal is to infuse cash into the business, expand the business, or a new business, then an exit strategy for returning the capital will be mostly likely required by an investor.

@Kenneth Jiang  As a Chicago developer, I have seen markets move significantly 4 times.  Each of the areas you question can either make or break a deal.  The role of a developer (your role) is to make sure none of those 4 areas break your deal.

1.  Evaluating.  We always work back into the price.  Having a stress test applied to your model is also very important.  It is always much easier to look at a deal in the "best case" scenarios.  Many developers who were competitors only looked at "best case".  When, not if, the market turns it gives you better ability to move onto the next deal.

2.  Ultimately, how the GC or the CM do their business will determine which is better for you.  If you work with a GC, then it is important to have a good set of plans and a defined scope of work, and a good proposal.  Otherwise, change orders can kill the project.  There will be change orders.  A CM typically works as your agent to get you the best pricing and terms as the model is open book.  It requires a different kind of trust.  

3.  Same with a designer.  There are good ones an not so good ones.  The good ones understand how their decisions impact the budget of the project.  The not so good ones have no understanding of the repercussions of their decisions.  For instance, cabinets - we can quote the exact same house for cabinets and get pricing that can easily very $100,000.00.  Each selection can have the same variance.  The good ones know how to work within a budget.

4.  Global Sourcing - when making selections it is important to understand how easy it will be for trades to work with the product.  An example closer to home.  Some of our clients wanted to use brand name from national retailer hardware supply stores for plumbing.  The products sold at lower pricing at these chains is not the same from national distributors.  They vary.  So when something doesn't work it makes it harder to get it addressed.  Again, think of "worst case" scenario.  If I order from Italy "x", and it doesn't come, how will it impact my costs...holding costs, getting trades back on the job, etc.

@Mandy Whittle 

We have worked with numerous churches to assist them with acquiring, financing, designing and building their facilities.  Each of them sought the property for their primary purpose of worship/office/etc, and then sought out additional uses as well - nursery school, food bank, place of worship for a Jewish congregation (Saturday versus Sunday), auxiliary space for the local library that needed additional educational space, counseling, etc.

There is merit to your concept, but many factors come into consideration:  zoning, parking, how easy it is to "convert" space, etc.  Zoning should not be too much of an issues, but uses may alter parking requirements.  On the plus side, lenders review that as well as they will look at the size of the congregation, giving strength, as well as other sources of income. 

@alex 

@Alexander Straffin and @Rob Hinh.  Welcome to the world of real estate development and construction.  

First, two vastly different sides aspects of real estate, which explains why there are not books that combine both topics.

A prefab building may/can simplify the construction sequencing process, but not sure I understand your comment about "lowest risk possible".  Having one vendor accomplish many of the trades at a fix price - can reduce the risk from a construction budget perspective.  However, there are many other factors to consider on the development side.

Role of the developer is to put together the vision, financing and ownership of the project.  Determining what gets built, how much gets built, what goes into the building, the end use of the property, and how to capture the economic value for that vision.  It involves working with equity, loans, buyers, sellers, mortgage brokers, real estate brokers, attorneys, title companies, insurance, municipalities, architects, engineers, and contractors.

Role of the contractor is to build what has been specified for the agreed upon cost of the work.  It involves coordinating the work amongst 16 to 20 potential subcontractors to work as efficiently as possible so each trade does their job as best as possible.  Specifying a prefabricated building may reduce/limit the scope of work for approximately 75% of those trades.  For instance, a prefabricated building may have the rough and most trim in the building upon delivery.  However, it still requires an onsite electrician to provide the service and make the necessary connections.  Same is true for plumber and HVAC.

As a developer, I think it is important to assess the risk in specifying a prefabricated building versus a custom building.  For instance, in many of the communities we work in, prohibit prefabricated buildings because the inspectors can not inspect inside the walls prior to the installation of drywall.  So for us, it increases the risk.  We work around this by installing prefabricated components - trusses, walls, floor decks, concrete, etc.

We always first discuss our concepts with the local municipalities to determine the viability of the project - zoning, construction, etc.  Next, we discuss with real estate brokers to determine the receptivity of our concept in the market place.  Then we work to get bids to determine the financial viability of the project.

Hope that helps provide some guidance as to how to begin approaching the project.

@Danny Heidle  Welcome to Bigger Pockets

@Alex Sotelo - I believe your question is how to find a mentor.  I believe the only thing you described about your current work situation is you are 19 and make $____/hour.  Not sure if you are in school, working part time, working full time, in what industry, etc.  If you are seeking a mentor in real estate, I would offer the best mentorship is working for someone in real estate.  Learn while you get paid!

If that is a possibility, then the question becomes, "How do I put myself in the best positions to find those jobs."  There are property management companies, there are real estate developers, home flippers, lenders, etc.  Many industries are needing employees.  I would first identify what I want to do, research local companies that do that work, prepare a resume, figure out in the company who does the hiring, and then get to know them extremely well.

@Aidan Richard Connly - Thank you for your service in the Marines.  My partner also served at Camp Lejeune with the Corp.   Feel free to reach out with any questions you may have.  Happy to assist you.