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Real-estate development Q&A


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#1 concorde

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Posted 21 June 2014 - 07:00 PM

Its pretty slow around the forum these days so if you want to ask any questions about commercial or multi unit residential real estate ownership, development, etc I can answer them on a general level


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#2 Mike K.

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Posted 22 June 2014 - 08:13 AM

Nice. One thing that's always been on my mind is how much a developer spends of his own money and how much is borrowed. I'm talking every aspect, including land purchases and architectural fees, etc, before construction even begins.

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#3 VicHockeyFan

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Posted 22 June 2014 - 08:18 AM

Nice. One thing that's always been on my mind is how much a developer spends of his own money and how much is borrowed. I'm talking every aspect, including land purchases and architectural fees, etc, before construction even begins.

 

If he has a good track record with past lenders, I'm sure he tries to use zero of his own money where possible. Certainly the developer I worked for did it that way.

 

He got 25% any which way he could, including selling some units to the awarded general contractor in order to shore up pre-sales numbers.  Then the other 75% was standard construction financing like Canadian Western Bank.


<p><span style="font-size:12px;"><em><span style="color:rgb(40,40,40);font-family:helvetica, arial, sans-serif;">"I don’t need a middle person in my pizza slice transaction" <strong>- zoomer, April 17, 2018</strong></span></em></span>

#4 Mike K.

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Posted 22 June 2014 - 08:22 AM

That's the financing part of it. What about the land purchase?

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#5 VicHockeyFan

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Posted 22 June 2014 - 08:49 AM

That's the financing part of it. What about the land purchase?

 

Well, in most cases you don't buy the land until you have rezoning in place and plans approved.  That's a subject-to on the purchase contract.  Like GMC/League with the Victoria Plaza property, that they never bought.  So if you are crafty and have the right backers in place, you can have 100% financed before you spend much money.


<p><span style="font-size:12px;"><em><span style="color:rgb(40,40,40);font-family:helvetica, arial, sans-serif;">"I don’t need a middle person in my pizza slice transaction" <strong>- zoomer, April 17, 2018</strong></span></em></span>

#6 Mike K.

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Posted 22 June 2014 - 08:50 AM

Hmm. That's interesting.

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#7 concorde

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Posted 22 June 2014 - 08:51 AM

On a general level most developers do not spend any money up front on development, land purchase, etc.  That of course depends on their relationship with the banks and their track record.  Since all expenses including interest is tax deductible there is no incentive to use our own money.  Also keep in mind we have been in a long period of very low interest rates so money is pretty much free

 

When the financial crisis hit in late 2008/early 2009 banks suddenly closed their doors for several years on lending money even to established developers with extensive collateral.  Even the Jawl's had trouble getting the full amount required to build the Atrium.  I heard BC Ferries ended up loaning them money and I forget the amount (I have no proof this happened, this is word of mouth which comes from a reputable source)

 

Its an old trick to sell units to the general contractor and major subtrades (mechanical, electrical, excavation, etc) if they want to be part of the job, but that is typically done in slow economic times when units aren't selling

 

Mods, feel free to move this to its own thread, I don't know how to do that.



#8 VicHockeyFan

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Posted 22 June 2014 - 08:55 AM

 

When the financial crisis hit in late 2008/early 2009 banks suddenly closed their doors for several years on lending money even to established developers with extensive collateral.  Even the Jawl's had trouble getting the full amount required to build the Atrium.  I heard BC Ferries ended up loaning them money and I forget the amount (I have no proof this happened, this is word of mouth which comes from a reputable source)

 

 

 

Yup, it happened, it's on the books.  BCF loaned the Jawls $25M at 3.4%, while at the same time they also borrowed $140M (a bond issue) at higher rates (between 5 and 6.5%).


<p><span style="font-size:12px;"><em><span style="color:rgb(40,40,40);font-family:helvetica, arial, sans-serif;">"I don’t need a middle person in my pizza slice transaction" <strong>- zoomer, April 17, 2018</strong></span></em></span>

#9 Mike K.

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Posted 22 June 2014 - 08:58 AM

Isn't BCF part owner of the Atrium?

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#10 concorde

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Posted 22 June 2014 - 09:00 AM

Well, in most cases you don't buy the land until you have rezoning in place and plans approved.  That's a subject-to on the purchase contract.  Like GMC/League with the Victoria Plaza property, that they never bought.  So if you are crafty and have the right backers in place, you can have 100% financed before you spend much money.

Now that's more specific to each developer.  You have to look at the land and is it producing positive cash flow after expenses such as an existing building or parking lot.  If that is the case typically I would buy the property prior to rezoning and let the positive cash flow cover my expenses while I go thru the rezoning process.  If its a dirt lot with no cash flow I would typically make the existing owner deal with expenses and put a subject to rezoning offer on the table.

 

I would also add it depends on the financial condition of the developer.  I think we all know why League put a subject to on Victoria Plaza



#11 concorde

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Posted 22 June 2014 - 09:04 AM

Isn't BCF part owner of the Atrium?

I wasn't aware of that, I would have to find out.  Can anyone else confirm that?



#12 Mike K.

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Posted 22 June 2014 - 09:07 AM

So someone like Chard essentially has most of his costs covered in the hopes he makes money for his financial backers eventually? That's amazing.

How much is the expected return for a developer? Let's say the project is budgeted at $50 million with the land purchase, rezoning costs, architectural costs, etc.

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#13 Nparker

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Posted 22 June 2014 - 09:14 AM

Isn't BCF part owner of the Atrium?

Yes.


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#14 Mike K.

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Posted 22 June 2014 - 09:16 AM

I've been under the impression that one of the reasons BCF ditched Tri Eagle's Gateway Green and backed the Jawl's Atrium was that they would own a piece of the pie. The Jawl's weren't about to lose a long time tenant like BCF to a competitor.

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#15 VicHockeyFan

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Posted 22 June 2014 - 09:21 AM

So someone like Chard essentially has most of his costs covered in the hopes he makes money for his financial backers eventually? That's amazing.

How much is the expected return for a developer? Let's say the project is budgeted at $50 million with the land purchase, rezoning costs, architectural costs, etc.

 

It's not "amazing" if you have a good track record, as Chard does.  Lenders want to find other places to put money, than just earning 3%.  If they think they can get a quick 10% per year, over the three years of the construction/selling, why not?

 

I would think most developers will aim for 15-25%.   Some projects will hit, some won't.  Of course, developers will also build in thousands of dollars of management fees per month to the project cost, to cover their salary, and their office expenses (staff wages etc.) while the project goes along.  None of the lenders expect all the developer's staff to go unpaid as the project is built.  So at the end of the day, even if the project loses money, everyone should be OK, except the 2nd/3rd-mortgage holders (the original "expensive" risk money).


<p><span style="font-size:12px;"><em><span style="color:rgb(40,40,40);font-family:helvetica, arial, sans-serif;">"I don’t need a middle person in my pizza slice transaction" <strong>- zoomer, April 17, 2018</strong></span></em></span>

#16 concorde

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Posted 22 June 2014 - 09:37 AM

as VHF says it all depends if the project is a success or not.  I typically shoot for 20-25%, but sometimes the project doesn't lease/sell right away and you are stuck paying costs and it can shrink down to the single digits.  Sometimes I do better than 25% sometimes I don't.  No one brags to each other about what they make, but I think I am typically on the higher side than most developers as I watch my costs and overhead very carefully.  Sometimes I have acted as my own general contractor to save costs as well

 

Yes, every developer includes for every expense as part of their overhead including project management, travel, legal, hotels, etc, etc

 

I've heard Chard is very demanding and sometimes he thinks he is building a Cadillac when in fact its a Chevy.  I understand he got pushed out of Vancouver years ago and I forgot why, but the reason wasn't positive.  Damn, I have to start writing the juicy stuff down



#17 Szeven

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Posted 22 June 2014 - 02:28 PM

What comes first, your idea for a property, or the property and you come up with an idea? Do you find property listed for sale or approach places not for sale? How many properties get held vs sold on completion?

#18 concorde

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Posted 22 June 2014 - 06:24 PM

Usually I get info sent to me by the big commercial brokers like Colliers, CBRE, DTZ, etc.  I'll look at it and think what could I put there and if in my head it looks like it could be very profitable, then I'll scratch out some numbers and go from there.  Some of my leads come from fellow developers who tell me they or someone we know are thinking of selling

 

Rarely am I driving around saying "now I wonder what could go there?"

 

As for how many properties get held vs sold on completion each developer is specific.  In the condo game its obviously sold off.  In commercial real estate it all depends on the numbers of what I can get for it at completion vs long term revenue.  Sometimes I simply want the cash and sell it off.  For me, I would guess I sell off anywhere from 20-40% in commercial

 

Also, a lot of the properties I own, I bought as existing buildings and didn't do any development



#19 jklymak

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Posted 23 June 2014 - 01:59 PM

I think the 286k is inclusive of the commercial space and that is NET, not gross.  You won't be taking that home.  As I said in 10 years property taxes will be 60-80k a year.  The 286k is likely also based on 100% occupancy and we all know you will have vacancies to account for.  Here's a shocker for you renters, as landlords we build in a vacancy factor and build it into the tenants rent

 

I'm confused by your use of the words "net" and "gross" as you seem to mean the opposite of what everyone else means.  



#20 concorde

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Posted 24 June 2014 - 06:50 PM

Ooops, for some reason in my head when I think I saw someone say they would take over 300k a year I think my mind said no, thats not right and switched them around.  Sorry, yes gross is before deductions and net is after.

 

Stupid mistake on my part


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