Property Investment and development........

[vinylgroover]

That's my field of experience and i'm happy to assist those with any queries or question, tips, advice etc.

By way of background, I have a degree in Business majoring in real estate finance and development. I currently work as a development manager with a major real estate development company here in Australia and i am currently responsible for managing the re-development of two major projects worth $1.5 billion. My role includes such things as site acquisition, feasibility analysis, design development, financing structuring, planning, construction management, marketing and responsibility for overall delivery of the projects.

I have over 8 years of property experience.

Unfortunately, because i don't live in the U.S i am not familiar with the market trends over there, but i can advise on general property investment principles and things to look out for and consider. So i can't answer any questions like "Is the San Fransisco market a good buy at the moment", but i can advise you on what to look for in any investment.

I'll do my best to give advice here on property related issues.

 

[bran987]

we have the same job. you have 5 more years of experience.

what experience/opinions do you have on free&clear land owners contributing their interest as equity toward development?

 

[vinylgroover]

we have the same job. you have 5 more years of experience.

what experience/opinions do you have on free&clear land owners contributing their interest as equity toward development?

It all depends on the attitude of the particular owner involved towards development risk and the experience/financial standing of the development company involved in the deal. First call by creditors on a failed development is the land contributed, and assuming construction finance is 100% debt, the only one that loses is the party that has contributed the land/equity.

For a developer, having a land owner contribute their land as equity is great as it means the IRR on the project will go through the roof as there are no holding costs through the life of the project for the developer. I have tried to convince many land owners to do just that, but most are usually too scared to risk being involved, and they usually end up selling their land outright to the developer.

A joint venture deal can be structured in many ways, however, the ultimate development/financial goals of the JV partners need to be similar otherwise it becomes very difficult to structure a JV that suits both parties. In my experience, that is typically the biggest problem when you have a large company entering into a JV with a small private owner.

As an example, I was involved in a deal 6 months ago where i approached an individual with a a great piece of land to either sell to us or do a JV. He wants to do a JV, but he also wants us to stay in it in the long run, ie: develop and hold. We are not interested in being a long term owner.......we just want to develop, sell and take our profit and move on to other projects. Without us, he doesn't have the ability to carry the debt and re-finance and hold on to the development as a long term investment when completed (end value is about $45m).

 

[beastboy]

Guys....just wanted to say you have my ideal job.....If I could only go back in time.....

 

[vinylgroover]

Guys....just wanted to say you have my ideal job.....If I could only go back in time.....

as i've told you before beast,it's never too late. You've got one of the best skill sets around to work in development. My boss is a civil engineer and two of my colleagues are also engineers who got out of construction/engineering and into development.

Understanding engineering/construction issues is half way to being a good development manager. The other half is in understanding the finance and property market fundamentals which you will learn.

Make some approaches, what have you got to lose?

 

[MattTheSkywalker]

It all depends on the attitude of the particular owner involved towards development risk and the experience/financial standing of the development company involved in the deal. First call by creditors on a failed development is the land contributed, and assuming construction finance is 100% debt, the only one that loses is the party that has contributed the land/equity.

But creditors can't keep the land, so it is invariably resold and the cycle begins again. This happens regardless of who owns the land, whether it is sold to a developer pre-development or not, right?

For a developer, having a land owner contribute their land as equity is great as it means the IRR on the project will go through the roof as there are no holding costs through the life of the project for the developer. I have tried to convince many land owners to do just that, but most are usually too scared to risk being involved, and they usually end up selling their land outright to the developer.

Selling is risk free. Why would a landowner take on risks that benefit the developer, when the owner's up-side is guaranteed through the sale of the land. In the US anyway, most developments fail.

Once the land is sold, the seller has freed up capital for use elsewhere.

Now - here is thought for you: By selling the land to the developer, the costs of development go up, because in addition to the actual construction, the developer has to pay for the land as well as any carrying costs.

With today's low interest rates, everyone is suddenly a developer. They get a loan, make their checkpoints, and then suddenly, a condo tower or master-planned community is built.

Yet three years later, the project is a failure, and you have all this stuff built and sitting empty. It is happening in FL now - developers built apartments as fast as possible (as cheap as possible, that is) and after they cannot make money, the projects are sold and/or converted to condos.

The end result is a lot of blights on the landscape.

Might the risk of failure be decreased if land-owner contribution increaed, thereby restraining some "developers"?

A joint venture deal can be structured in many ways, however, the ultimate development/financial goals of the JV partners need to be similar otherwise it becomes very difficult to structure a JV that suits both parties. In my experience, that is typically the biggest problem when you have a large company entering into a JV with a small private owner.

This is the inherent problem with land owner contribution.

 

[bran987]

Hmm.

These usually aren't quite as big of a failure as you guys are suggesting?!

It sounds like you are describing the late 80's again.. most developments in the US fail?? (maybe most developments by rookies, but that is in any market boom or bust) empty apartment buildings everywhere?? everywhere? yes the apartment market has been hit hard because of interest rates, but this condo thing is going to slow waaaaaaaaaay down soon.

The reason a land owner contributes as equity is because of greed, and they also like the feeling that they are big shot developers. These guys usually have huge egos. They see Dollar $igns. There is huge upside if the project makes sense, we made a man $15million on a $3million piece of land last year. That is the reason they don't just sell the land for the $3million it is worth empty. Obviously you should never go shotgunning these things just to see what shit will stick, that is suicide you are better off going to Vegas.

There is a problem getting them to give up control, I was wondering if you had experienced that same issue. Most just don't want to let go. I think we all agree, the personalities must be a fit. I guess it is the same as most other business relationships.

Now - here is thought for you: By selling the land to the developer, the costs of development go up, because in addition to the actual construction, the developer has to pay for the land as well as any carrying costs.

The cost of the land is the cost of the land, one way or the other.

The easier it is to get in, the more flakes you'll have, the more failures.

Huge corporations can afford to buy the land outright, and don't have to deal with land owners or this JV junk. They also take 100% of the deal this way.

Smaller (relatively) developers, however, who don't have the ability to, (or the particular inclination to) put up $15 million to take down a piece of land, look to land owners to contribute in exchange for what is usually a 50/50 deal. 50% in exchange for 'expertise'

If the land owner will not contribute, the smaller developer has to go to other relationships to take down the land (i.e. Lehman) who will suck an even higher percentage of the deal. However, this is a very reliable partner.
If the smaller developer doesn't have one of these relationships, he is simply handcuffed.

There are 3 levels of people who can get into these big deals.

1) people who can't buy the land outright, can't get a big institutional partner, but CAN convince a guy to contribute his land.

2) people who can't buy the land outright, but CAN get institutional partners to step in, or CAN convince a guy to contribute his land

3) people who can buy the land outright, just outbid #1 & #2 they are so well capitalized.

So to answer your question, I don't think that land owner contributions increasing would restrain the fly-by-night "developers", but rather encourage them! If there were no land owner contributers, this would freeze out developer Type 1 above, usually the least reliable and least successful for obvious reasons.

Did I misunderstand your thought?

Vinyl, or in Australia what run rate are mezz partners charging right now? Over here 16-18%, deferred look back to Day 1.

 

[MattTheSkywalker]

Hmm.

These usually aren't quite as big of a failure as you guys are suggesting?!

It sounds like you are describing the late 80's again.. most developments in the US fail?? (maybe most developments by rookies, but that is in any market boom or bust) empty apartment buildings everywhere?? everywhere? yes the apartment market has been hit hard because of interest rates, but this condo thing is going to slow waaaaaaaaaay down soon.

Well, I was just throwing some stuff out there to solicit feedback and discussion.

However, in Atlanta, one can see the frenzy of development in the late 1990s due to the dot-com boom and a lot of people moving to "the ATL." This resulted in legions of cookie cutter apartments being built and sitting empty now. Parts of Atlanta are wonderful examples of when suburban sprawl goes bad.

And Florida...well, this place is littered with unfinishe "master developer" communities, and yet more are being built in outposts like Port St Lucie and Indiantown.

What happens there is developers buy a ton of land, only the oceanfront is worth anything, anything more than 1/2 mile inland is swampy shit, and the projects get abandoned half done. Palm Coast (north of Daytona) is a really good example of this, so is "PGA something...." in Palm Beach Gardens, north of Palm beach.

The reason a land owner contributes as equity is because of greed, and they also like the feeling that they are big shot developers. These guys usually have huge egos. They see Dollar $igns. There is huge upside if the project makes sense, we made a man $15million on a $3million piece of land last year. That is the reason they don't just sell the land for the $3million it is worth empty. Obviously you should never go shotgunning these things just to see what shit will stick, that is suicide you are better off going to Vegas.

Good point on wanting to be the big swinging dick, people's arrogance kills me. My business philosophy (and I learned it from a very rich guy) is "greed before ego". The landowner you are describing is "ego before greed" or at least the two are side by side.

The cost of the land is the cost of the land, one way or the other.

Sure, but there is nothing like splitting costs.

The easier it is to get in, the more flakes you'll have, the more failures.

Low interest rates make it real easy.

Huge corporations can afford to buy the land outright, and don't have to deal with land owners or this JV junk. They also take 100% of the deal this way.

Smaller (relatively) developers, however, who don't have the ability to, (or the particular inclination to) put up $15 million to take down a piece of land, look to land owners to contribute in exchange for what is usually a 50/50 deal. 50% in exchange for 'expertise'

If the land owner will not contribute, the smaller developer has to go to other relationships to take down the land (i.e. Lehman) who will suck an even higher percentage of the deal. However, this is a very reliable partner.
If the smaller developer doesn't have one of these relationships, he is simply handcuffed.

There are 3 levels of people who can get into these big deals.

1) people who can't buy the land outright, can't get a big institutional partner, but CAN convince a guy to contribute his land.

2) people who can't buy the land outright, but CAN get institutional partners to step in, or CAN convince a guy to contribute his land

3) people who can buy the land outright, just outbid #1 & #2 they are so well capitalized.

This is a very good summary! I hope a lot of people read this. My experience on the finance side is that low interest rates make institutional investors MORE likely to invest in development, since there is no place else to park their money. In fact, last week's NY Times ran a peice about how institutional investors (many) have stopped looking for capital because with such low returns on most investments, they have no place to park it.

What invariably happens when institutional investors get invovled in something is the bastardization of the markets to fit the needs of the investor. (Mortgage backed securities in the 80s, Goldman Sachs doing an IPO, etc.)

I wonder how the increased involvement of institutional investors will impact the development business. I know that the AVM stuff is coming and real estate investment funds are coming, I just wonder if real estate is too large to be subjugated to the control of a few institutional players like every other market is.

 

[vinylgroover]

Matt, just picking up on your point about why land owners would want to contribute their land, it's precisely as Bran points out. The very few that do, do so because of greed and ego. They get into a JV with a large development company and it stokes their ego/greed to be part of a large re-development that they otherwise would not have the financial capacity or experience/knowledge to undertake on their own.

Many of the typical landowners that we approach to either sell their land to us or enter into a JV are not necessarily professional investors or land speculators. They are merely individuals who have owned a piece of land for a long time and the planning authority has re-zoned the land, suddenly making their land much more valuable. In my experience, the majority will sell outright as they are just not interested in the risk of a JV. Others who are greedy and driven by ego will stay involved in a JV.

Bran, as far as them not giving up control, in the JV development agreement, we make it clear that our company will be responsible for the development management of the project and we report on a monthly basis to our joint venture partner. We are not interested in sharing the decision making on the project, particularly with a partner who lacks development knowledge or experience. If they are not happy with that arrangement, then it's no deal.......it's just more trouble than it's worth.

Mezzanine finance is typically the same......above 16%, although with the heat coming off the residential market here now, it's closer to 20%.

Institutional investors are now highly involved in the industrial development markets here in Australia. This has severely reduced reduced development profits in Industrial development as the institutions are mainly concerned with running yield, not development profit. As a traditional developer, my company is only interested in development profit, not long term hold and we are being outbid for industrial sites by the institutions who are simply adding our required profit margin onto their land acquisition costs in order to secure the land. Off-market deals are the only way we can compete in the industrial development market with the institutions now.

Office and retail development is a different story..........higher risk which the institutions don't want to get involved in at this point. With Industrial property, a greater proportion of a property's value is held in the land than the buildings, which better suits their development risk profile.