Commercial Real Estate FAQ With Stephen Epstein On Real Estate Development & Investments

Your Questions About Commercial Real Estate Development Answered

The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.

From knowing who to trust in real estate development deals, to breaking down commercial and residential depreciation, your commercial real estate questions are answered by the most experienced and successful in the industry. For those who are budding real estate developers themselves, learning from the experiences of those who have come before you can lead you in the right direction to building your own multi million dollar real estate development firm. With knowledge and information building any strong foundation in commercial real estate, these answers provided are invaluable. 

What is depreciation and why does it matter? So, Richard, depreciation is an accounting concept more than a cash concept. And what that means is it really has to do with how you think about a property or an investment on your tax return, meaning what are the tax consequences of owning real estate or buying a piece of equipment. And so depreciation is really a very simple concept. What it is is its obsolescence of something. So, over time, let’s say you purchase a truck, a moving truck for your moving company – well, that moving truck, it’s going to get beat up, it’s going to get old, it’s going to become basically obsolete, right? Over maybe 10 or 15 years. And you could say the same for a building. Now, a building isn’t going to get obsolete in 5 or 10 years, but over the course of 20, 30, 40 years, you could see that a building would. In fact the structure itself, not the land, but the structure would diminish in value and the accounting for that on your tax return and trying to capture that cost of eventually having to replace that building or upgrade it is captured in the concept of depreciation. 

And so commercial and residential building assets can be depreciated either over 39 years, or for residential property 27 and a half is the last tax code that I recall. So, basically that means that if you have a $100,000 building that you built on a $50,000 piece of land, you divide $100,000 by 39 years and every year you would have 1/39 of that, which – let me do out the math real quick – so basically you’d have 1 over 39, on commercial is 2.5% a year times 100,000 would be roughly $2,500. So that would be your annual depreciation costs, and so the idea is that the building is losing $2,500 worth of value every year so that gets captured. And you get an expense for that; you get to expense that on your tax return, so you don’t have to pay taxes on $2,500 worth of income that particular year. 

It’s a little bit faster for residential properties, like I said, it’s 27 and a half when I looked it up here. That may by outdated, but that’s the last that I knew. So, depreciation, it’s a tax concept, it’s not a cash expense, it’s a tax expense. But it’s good to set aside money every year to cover the cost of your depreciation, to set aside actual cash because, you know what? That building will be obsolete, and if you do hold it for 20 or 30 years you are going to have to replace it or upgrade it, so it’s a good idea to have set asides to cover the actual depreciation. But depreciation itself, is a tax concept. Hopefully that helps.

How does a fee waterfall work in commercial real estate? So, a waterfall is simply a name for a tiered system of compensation. So, let me give you an example of a waterfall, and then I’ll explain what a waterfall is, because it’s easier to understand what a waterfall is when you actually use a real example. So, let’s say you and I, Richard, invest in a project together and you’re my investor and I’m the developer, okay? Well, we make an agreement about the waterfall here, which is just basically how does the profits get divided between you and between me. Depending on how different thresholds are met for the potential returns on this project. So let’s say we have an agreement that before anything happens, you earn 10% on your money. I don’t make anything except after when you make a 10% return. So the first leg of the water fall is the 10% return to the investor, to Richard. Now, next on the waterfall we may say “Look, from a 10% return to a 13% return, what’s going to happen is that I’m going to get, as the developer, I’m going to get 30% of those profits and Richard you’re going to get 70% of the profits.” Up until a 13% return. So, from 10 to 13% return, there’s this split. Now we may also say that okay between a 13% return and a 15% return, it’s going to be a 50/50 split between me the developer and Richard the investor. And we could say beyond a 15% return, it flips the other way where me as the developer gets 70% of the return and Richard gets 30%. 

And so what that does is it aligns the incentives of the investor and the developer. It basically ensures that the developer gets the lion’s share of the profit up to a certain point. But then beyond that point the investor is willing to share disproportionately more money, and the developer demands disproportionately more money of the upside. The thought being that look, if I can deliver a 12-15% return to you, I deserve to share in the bounty also. And so that very fundamentally is how a waterfall works. And you can invent it to make it do anything you want. You could change the percentages, you could do all kinds of fancy things, but fundamentally it’s just a tiered structure where the economic benefit shifts from person to person.

What are some real estate related tax strategies for investors to keep in mind? So, tax strategies for real estate really depend on whether you’re going to buy something and hold it for the long run, or whether you’re just developing something for the short run and then selling it. If you’re developing something for the short term, there really aren’t a lot of tax benefits. And that’s maybe unfortunate, but when you buy and hold you have a lot more tax incentive – such as depreciation. But if you’re a developer just building a building stabilizing it and selling it, you don’t really get any kind of meaningful tax deductions or tax breaks from doing that. Sometimes, in some areas, there’s tax credits available, but that’s a whole other subject of subsidies, sort of government subsidies, and local subsidies maybe for affordable housing or what have you. An area that I’m not terribly familiar with, but it’s definitely a specialty in real estate. So, if you live in an opportunity zone, there’s great tax incentives or if you want to do a development project in an opportunity zone, that’s new legislation that came out that provides some very favorable tax incentives. But, again, they require that you hold the property in order to maximize the tax benefit of the opportunity zone at least 10 years to get all the benefit of it. So, it really is set up to incentivize people to buy and hold real estate for the long term. 

The most advantageous thing you could ever do from a tax strategy perspective would be to build a project yourself and then hold it for a long period of time. And in doing that you would get the maximum amount of depreciation, because chances are you’d spend a lot of money relative to the amount of money you spent on the land. And so that, to me, is the holy grail, if you can build something yourself, develop it, lease it, stabilize it, and either refinance, refinance out the construction loan, and maybe pull some cash off the table through the refinancing process, and then hold onto it forever, and then you have some great depreciation and some great tax advantages.

What creative ways have you discovered to structure real estate deals? Structuring a real estate deal is like doing any kind of business deal. It takes a lot of creativity, it takes a lot of hard work, it takes a lot of back and forth on the legal side, on the finance side working with the bank, so there’s a lot of variables. And every asset class, meaning whether you’re doing office, you’re doing residential, you’re doing industrial, each of them have their own kind of nuances when it comes to deal structure and what investors like to see, and what the bank wants to see. So, in terms of creative ways, what I would say is that the majority of the creativity in a deal has to do with the capital stack. Meaning how do you put the money together to do the deal? And that is where, honestly, you have the most creativity and flexibility because you can do anything you want as long as you come up with the money, right? In order to buy a deal, or to build a project, you can do a million different things in order to come up with, let’s say, $10 million to build an industrial building. It doesn’t matter where you get or how you get the $10 million as long as it’s legal, so there’s millions of different ways to structure a transaction. And so what I would do is encourage you to, whoever is listening to this, to be as resourceful as possible and as creative as possible about how you put the deals together. There’s private money out there, meaning in the form of debt and equity, people will lend you money, private investors will lend money so you don’t even have to go to a bank, there’s private debt funds out there, there’s investors of all kinds, institutional equity investors, friends and family equity investors, crowdfunding. 

There’s so many ways to get a transaction financed that I think, to me, that’s where the magic lies in doing real estate deals. Now of course if it’s not a good project and it doesn’t have good risk adjusted returns, then it’s going to be very difficult to be creative with your deal structure, and it’s going to be very difficult to get the project financed at all in the first place. But if it’s a very good deal, and you have control of it, very important meaning you have it actually under contract, then there’s lots and lots of different ways you can get something financed and it’s really only limited by your imagination.

How do real estate developers charge fees to investors? So the way that a real estate developer gets paid is typically through a real estate development fee and/or a project management fee. And industry standard for, sort of, larger deals, a deal let’s say bigger than $3 million and less than $50 million, sort of that average sized real estate development project, not institutional real estate deals but the types of deals and projects that we would be looking at here. The typical fee is somewhere between 3 to 5% of either the total project cost or 3% of the hard cost depending on whichever is less. And so that can change based on the product type or this or that, but generally speaking CA South charges about 3% standard developer fee on the total project cost including the land. And so on a $10 million project that’d be a $300,000 developer fee, and you figure that’s a two year deal, it takes 24 months to manage the project, you’re looking at $150,000 per year, you’ve got to pay pretty much your whole team and cover all of your overhead in order to be able to do that. Which is, if you’re just a one man band, that could sound pretty good, but if you have an actual organization it could be basically a break-even proposition. And so once in a while depending on the investor, they may or may not be willing to pay a project management fee as well, project management fee would be typically in the 1% range of hard costs or total project costs depending on what you can negotiate. 

But it’s really going to depend on how much your contractor is charging you for the construction management work. And so if construction management work is included in the general contractor’s bid, then the project management fee may not be justified, but if you as a developer are doing a lot of construction management and project management, then a fee would be definitely necessitated and justifiable. So, really all the fees, there are industry standards, but everything is really a function of what can you negotiate with your investors, how much work are you actually doing compared to the contractor, and how good of a project it is and how many other options you have. So, that’s my take on fees.

What is cost segregation? So, cost segregation is the process of doing a formal study by a CPA firm in order to determine what kind of depreciation each item inside your construction project is eligible for. So, I’ll give you an example. Let’s say you have a $10 million industrial project that you’re building, well you could hire a CPA to go in there and look at your construction budget, or even just your acquisition of the building, and determine okay this much of the value of the building is attributable to the HVAC system. This much is attributable to the doors, the ceiling tiles. This much money should be allocated to, you know, whatever; whatever parts and pieces, the landscaping, the this, the that, whatever. And so at the end of it you get a detailed breakdown of kind of how all the costs are segregated, meaning broken out. And what that allows you to do is instead of depreciating everything that’s the building, because you can’t depreciate the land. So let’s say you have a $10 million project, and you spent $2 million on the land, now you’d have a depreciable basis of $8 million, right? Because whatever is not the land is the building, and whatever is the building is depreciable over 27.5 years for residential type uses, and 39 years for commercial property. So you would look at the costs of how are these different parts and pieces of the building divided up, and your CPA would say “Well, the HVAC system you can depreciate that over, let’s say, 7 years. And you can depreciate the roof over 5 years. And you can depreciate the carpeting over 12 years.” I’m just making up numbers, but you get the point. And what that does is it allows you to actually accelerate some portion of that $8 million of the quote/unquote building that your depreciable base is, and accelerate it so you can take more of that depreciation and earlier years. 

So it’s an acceleration of your tax benefit. You would get all of that depreciation over let’s say the 39 years, but let’s say you want to take a big chunk of it next 3 or 4 years, you would do a cost segregation study with a CPA and they would basically figure it out. Now it can be pretty expensive to do these cost segregation studies, because they have to document everything and prove that they’re not just making up numbers, so you have to have a pretty big property in order to justify it. I would say probably north of $3-5 million minimum to make it worth doing a cost seg. So, that’s really what a cost segregation study is and it only should be done and used if you plan on holding the building at least 5 or 10 years because if you just hold the building for a couple of years and you do the accelerated depreciation, you’re just going to end up paying depreciation recapture tax when you sell it, and that’s not going to serve you anything. So, anyway, those are the tips that at least my exposure of cost seg

How can you secure debt for construction or commercial real estate? So getting debt for real estate development projects is very difficult. You have to have a balance sheet, meaning you have to have liquidity, you have to have cash, you have to have a net worth, you have to have a guarantor, or even if you’re doing non-recourse debt, meaning not personally guaranteed debt, you still have to have a strong track record and you have to have lots of cash around and have liquidity. So, getting debt for construction, or even acquisition, is not an easy thing. You have to have number one first and foremost a very strong project that makes a lot of sense. You can’t be overpaying for something and expect to get good financing. So, securing debt for real estate projects is definitely, in my opinion, the hardest part about everything having to do with development, and construction, and acquisitions. Because banks are fickle, they’ll tell you that they’re going to do the loan and then right up to the last minute, 12th hour, they’ll say “Oh, you know what? The investment committee changed their mind and we’re not going to do this.” And then you lose your earnest money and it creates all kinds of messes. 

So, finding a very strong partner who has a balance sheet, or has a very strong track record, or who would be willing to sign on the debt, is, I think, a necessity for when you’re getting started. It’s very difficult if you have no background and you haven’t done this before, or you don’t have a big net worth in order to get financing and secured debt for real estate development or acquisition projects. So, unless you do very low leverage in which case you’ve got to come up with an enormous amount of cash, in which case your returns aren’t going to be that great because you’re not getting much leverage. So this is definitely the trickiest part, and so my best piece of advice to securing debt is number one doing good projects, number two finding partners that are very financially strong if you’re not.

What are typical rates or terms for commercial real estate development lines of credit? So, banks are pretty reluctant to ever give meaningful lines of credit against real estate, especially for development, unless they’re pretty low leverage. So, lines of credit are pretty tough to get. Commercial real estate development loans, I would say, I mean right now we’re in a historically super low interest rate environment, which means that rates are very low, so I would say all-in you’re in the 4%-6% range for real estate development financing. And then if you’re buying a permanent asset that’s already built, like you’re buying an apartment building, you might get 3-4% type financing. But again, it’s going to depend on your liquidity, your credit worthiness, it’s going to depend on the strength of the asset, the strength of the collateral, the market you’re in. So there’s a lot of variables that are involved in this. And these things change a lot, so what I would do is just, you can do a quick Google search for commercial real estate mortgage rates, or development construction loan rates, and you can kind of just see the different rates and where they are that day. But that should give you a general sense for kind of where they are.

What are the different types of real estate development fees? You know, the different types of real estate development fees can vary depending on who your investor is, or the institutional, is it friends and family, is it high net worth individual, family office – those types of things. But, generally speaking, if you’re doing a development deal, you’re going to get a developer fee, or you really should because it’s really impossible to run a project for 2 to 3 years with no fees no way to cover your overhead. That’s a big ask if somebody is asking you to do that. So you better have a huge percentage of the upside if you’re not getting any fees at all. But, generally speaking, in a development deal you have a developer fee, and you may or may not have an asset management fee. And your developer fee can be 3% of either the hard cost or the total project cost depending on what you can negotiate, and 1% of the total project cost or the hard cost again depending on what you can negotiate. Now, once you own an asset, and you’ve built an asset that’s a stabilized asset, that’s totally leased out and cash flowing and maybe you’ve refinanced it, then you’re typically justified in paying yourself and receiving an annual asset management fee. And those can be anywhere from 1 to 2% of the revenue. So if you generate $1 million in annual rents, you can do the math on what those fees look like. 

So, there’s asset management fees, those are typical, if you’re a developer and you’re getting a developer fee and a project management fee, you typically will not also get an acquisition fee, but you might. Depending on how good of a deal it is, and how motivated your investor is. That’s kind of a grey area. There’s nothing wrong with it, it’s just there’s not really clear guidance. Now if you are buying an existing asset – not developing something, which means you’re not going to get a developer fee, and you’re not going to get a project management fee, then typically it’s customary to get an acquisition fee, and an asset management fee, and then a disposition fee when you then sell the asset. So if you buy and build and lease and sell and hold and manage an asset, you could presumably get an acquisition fee, a developer fee, a project management fee, an asset management fee, a disposition fee – all the fees, I may have named some of them twice, but you could potentially get all of them. But the reality is that most people either do asset management, and get an acquisition fee and a disposition fee and an asset management fee, or they do development where they get management fee and a developer fee.

How long does it take to typically complete a mid sized commercial real estate development project? So, it can take anywhere between 2 and 4 years to do a development project. It kind of depends on when you start the clock. So, a lot of people think of a project starting once it gets financed, and then maybe your entitlement period begins, and then you break ground, and then you complete construction, and then you lease it up, and then you stabilize it, and then either you sell it or you refinance it. That can be half or even three quarters of it; really the clock starts when you get something under contract. And then you an have 3 to 6 months of due diligence; just seeing if you like the deal before your money goes hard, meaning non-refundable, and then you begin the entitlement period. So, it’s very rare that the construction process itself takes less than 12 months. And you may also have 6 months worth of site work. And you may have 6 months to 12 months of entitlements, some working backwards here. So, you’re looking at 6 to 12 months of due diligence and entitlements on the front end, you’ve got 6 months maybe of site work, you’ve got 12 to 18 months of actual vertical construction, then you could have 12 to 18 to 24 months of lease up and stabilization. So you’re talking many many months, and that’s why you need a developer fee and other asset management fees or project management fees in order to help you get through these different periods. Because it’s very expensive and time consuming to manage a project over the course of several years.

What are the returns that commercial real estate development versus cash flowing properties typically in terms of expected IRRS? So, I can only speak for projects that CA South is doing in Nashville. Meaning industrial projects, multifamily projects, residential condo projects, office buildings – so that’s what our company does, so for us we target on development deals 16-22% IRR annualized. So if the money is out for 3 years, that’s earning call it 20% every year for 3 years at the end. Right? That’d be a 20% IRR. On stabilized existing cash flowing deals, the IRR is way way less. If you’re doing a value add deal, or you’re doing something in construction or repositioning you may get a better IRR. But if you’re just buying something that’s a good asset, it’s already relatively well managed, you know you might be looking at a 6 to 8 to 9% IRR, if you manage it well. I mean, when you buy something I just read a statistic that said that the national average for multi-family buildings was a going in cap rate of 5.2%, meaning they were purchasing the asset on multi-family buildings for 5.2% yield. That means if you just held it and then you sold it, you’d have a 5.2% IRR, right? If you didn’t have any appreciation. And so it’s tough when you’re buying something for a 5% yield to start driving out of that 7, 8, 9% IRRs. But that would be kind of the range that I would expect.

What is a great commercial real estate due diligence question for an investor to always ask? Wow, you ask a good question here, Richard. Depends on whether it’s a development deal or just a straight investment deal. The most important thing on a development deal that I would ask is does the developer have a track record, have they developed this asset class before, do they have knowledge in the market, are they experienced and will they be able to get this done, will they have the right financing, do they have the right zoning, are all the entitlements in place? To me, the biggest question is, as a developer, is the land fully entitled and what are the sort of unseen risks that should be evaluated? And really the cool part is that a title attorney, or really an attorney of any kind, that you as the investor hire to represent you can always ask the developer for evidence of the correct entitlements actually being all in place. So it’s very common when CA South gets institutional investors looking at a deal, that their attorney sends a long checklist of different due diligence items that they want in order to see proof that yes this piece of land has been in fact rezoned from agricultural to industrial land, and yes you are allowed to build 140,00 square feet of industrial product on this 15 minutes outside of Nashville, and yes there are no issues with streams or easements meaning rights of way for electricity access or various other things. And so the best piece of advice I could give you is if you’re putting a meaningful amount of money to work behind a developer it’s very reasonable and standard for you to give them a due diligence checklist specifically regarding the entitlements. Because that’s where there’s a lot of risk, and if things go wrong there, it’s way worse than a little bit of cost overrun on a project or something. Because it could be the difference between not being able to build on something that maybe you already own. So, that’s my best piece of advice.

How can an investor get access to better real estate development investment opportunities? You know if I was an investor looking for real estate investment opportunities, obviously I would get connected with someone like Richard who can point you in the right direction and connect you with the best in class developers, people that he has a relationship with, people who he knows or who he can refer, I mean that’s an obvious no-brainer. But let’s just say you’re out there in the world and you don’t have any connections and you don’t really know kind of who the players are, the best thing I would do is identify a market you know or believe would be very strong. Let’s say you really like Nashville, right? And you said I want to invest in multi-family projects in Nashville. Well it’d be very easy for you to get the Nashville Business Journal online and start to look through and see who’s getting a lot of press. Who are the developers that are making moves? Who are the ones that are getting nominated for the different awards and different accolades and recognition? For example Meg Epstein who runs CA South Development was nominated for entrepreneur of the year, she’s developer in charge in Nashville, woman of the year entrepreneur, all these different – you’re going to find people are going to recognize the talented developers in the marketplace. The media is going to, or different groups and awards will. 

Obviously you want to try to get connected up with somebody who’s maybe not ultra-established. You’re not going to go to Greystar, a publicly traded rete, and say “You know, I’m an investor, I want to give you guys money.” They’re going to laugh at you because they’re a publicly traded company. So you kind of have to look and start asking around but the best thing you can do I think is just identify the market first, figure out what product type you want, and then just start doing a lot of research and then start making some phone calls. Let’s say you called CA South and said “Hey, I’m an investor from Toledo, Ohio, I’m looking to place a couple hundred thousand dollars into real estate development project. I want to know if you guys had any opportunities.” We would turn you over to our investor relations department, they’d give you some information and all that. And there’s probably other developers that would do the same thing. Or if CA South wasn’t accepting any money at the time, you know, we might say “You know right now we aren’t accepting any money, but we know this group, this group, and this group are doing similar deals, or different deals in a different sub-market and you may want to talk to them.” So, again, I would start off by obviously doing your research, and once you’ve identified somebody that you potentially want to do business with, then obviously check for references, right? Obviously ask for “Hey can I speak to some of your former investors? I want to confirm that you got good returns for them, I want to ensure that you acted ethically, and responsibly, and were a good fiduciary with their money. So that’s how I would go about doing it.

How do you evaluate land purchase opportunities when it comes to commercial real estate development projects? So, the value of land is always a function, of course, of location. But possibly more important than location is zoning and use and density. So the value of land is determined by what you can build on it, right? And that sounds very simple, but it actually is not always super easy to figure out because if you know that a piece of land could have a 7 story apartment building on it, well that doesn’t tell you how many units you can get on it, or how many square feet. You have to have an architect actually help you sort all that out. And then you have to run a financial model, and then you have to work with your contractor, and engineers, try to figure out what the cost would be. So, first and foremost, the value of land is determined by the density of what you can put on it and what is merited – meaning is it in an industrial area, is it in a hot multi-family area, is it in a cool downtown where an office building would work, is it five minutes from bars or restaurants or whatever. So really I would say land use, density, and location are the determining factors.

How hard is it to rezone land for real estate development projects? You know, this is a really interesting question because rezoning land can be very very easy, or it can be incredibly complex and impossible, expensive, you know, difficult to do, and it really just depends on your location and where you are. Are you in a favorable state where they are pro-development? Are you in a favorable city that’s pro-development and pro-business? Are you in a favorable neighborhood that’s pro-business and pro-development? Are you in a favorable block across from neighbors who are pro-development and want to see what you’re building? So, it’s very complex. Getting land rezoned for different uses is 100% the territory of experts. You want to work with very solid engineers, you want to work with very solid real estate entitlement attorneys or professionals that all they do is work to rezone land. You do not, under any circumstance, want to attempt this on your own unless you’ve done it many many times and you’re familiar with the area that you’re operating in. So, to think that you could just take an agricultural farm and turn it into, you know, a glam camping resort or that you could take an abandoned gas station and turn it into a hotel – I mean, you’re playing with fire.

So the best thing you can do is hire professionals that do this everyday for a living, and that’s what developers do. They hire professionals; they hire professionals for every aspect of the project from start to finish. So a real estate developer, unfortunately, has to be an expect in all these things, but not a master of any of them. So, it’s kind of an interesting nuance. You have to know enough about it to ask the right questions, hire the right people, and manage it very very carefully understand everything that’s happening, and then move on to the next step in the development project.

What financial metrics are key when managing real estate development projects? So, the financial metrics that are most important when you are doing a construction project would really have to do with budget compared to time. Where are you on the schedule, on the project schedule, compared to where are you on the project budget. You should know, you know, that if you’re 80% complete with your project, then you should be about 80% of the money spent. Presuming that it kind of flows that way, right? There’s exceptions, but if you said you were going to be out of the ground in January, but you’re out of the ground in June, you’re 6 months behind, that’s going to cost you tons of money in lost interest, in bank interest that’s going to accrue, and lost revenue in terms of leases, and you may miss the market, you may miss the school season if you’re student housing – who knows what, right? So it’s very very important that the schedule and the budget are managed very very carefully from start to finish in a real estate development project.

What do most investors overlook when evaluating real estate development projects? You know, I think investors spend too much time poring over the financials of the deal, and questioning the little assumptions here and there, and not enough time spent reading the legal contract and negotiating maybe the legal contract. That comes from a lack of sophistication on the legal side, and I think that can be more important than the economics of the deal. Are you getting a good deal, are you getting a fair deal, when it comes to the actual legal agreement? What are your rights as an investor? Are there any “gotchas” in there? We draft our contracts, you know, the way that we would want to invest our money. So, we don’t want any surprises, we don’t want our investors to be upset because “Oh, you didn’t tell me about this fee. You didn’t disclose that you were going to this. Or you didn’t tell us you were going to do that.” So often that happens and that’s the case, or “We wanted to get out in 3 years, and now it’s been 6 years and you won’t sell the property and we have no rights.” So, really, it’s very very important that you get a very competent lawyer, a real estate lawyer, a specialist, to negotiate these types of contracts for you. Do not give it to a generalist attorney, you want an expert. That is probably the most overlooked thing.

What does it take to grow a hundred million dollar commercial real estate development firm? This is a funny question, Richard! It takes probably 20 years of experience grinding it out is what I would say. It just takes a lot of experience; I mean you have to have done it so many times, seen and gone through so many different deals and scenarios of things going wrong, or having to fix things, or rescue deals. It’s just, there’s no replacement for experience I would say is the most important thing. And then secondly, that would be experience at the top, the developers the principals of the firm have to have done this for a very long time. They have to understand construction, they have to have a background in construction, they have to have a background in finance, they have to have experience in finance, they have to have done things and been in the market for a long time, and really understand the nuances of the market, all those are critically important. 

And then from there once you have that sort of foundation, I would say that the next step is just hiring a really really sharp team. Really bringing in specialists, really bringing in a chief development officer like we did who really understands this particular asset class and has very very deep experience in this one particular asset class, and then letting them manage that entire strategy and do their role. And then bringing in a CPA, MBA to be your VP of finance, like we did, in order to bolster our financial underwriting capabilities, our capital markets capabilities, and so really just bringing on very good people who share the same culture as you, who are very growth oriented, who are incentivized, who are bonused, and aligned, and investing in projects. That’s another key, I would say, if you don’t have everybody from the assistant and front desk receptionist to the property manager to all your high level VPs, and everybody on board and invested in your projects, like we do, you don’t have sort of everybody paddling in the same direction really taking that ownership mentality.

How can you quickly tell who to trust or not in the real estate industry? You know, trust is the most important thing. You have to go off of referrals, personal relationships, you need to check references; I don’t think there is a quick way to tell who to trust. I think you should build a relationship with somebody in depth before you give them money, and I also think that you can do a lot of research and see if somebody is well regarded in the press, whether they’ve got lawsuits filed against them, online a simple Google check will tell you a lot about somebody and whether they’re credible or not. You also have to just trust your gut, if you get a good feeling about them after you’ve done all your research and the objective stuff, you feel good, you get to know them and the seem and feel trustworthy, they don’t just say the right things I think that that’s really important. Another thing, too, is that you’ve got to trust your instincts. If you’ve got any red flags, or you just get a bad vibe from somebody, typically we sometimes want to ignore that because it’s inconvenient or we put a lot of time and energy into a deal or looking into a partnership with somebody, and the reality is your gut, your instincts, are usually correct. And so my best piece of advice is just don’t ignore your instincts, and if you get a bad feeling about something, if it’s totally unjustified then maybe do a little more research, but if you just get a bad vibe about somebody and then you do some research, and it’s not just all amazing press and PR and good media out there for them, if they’re not just squeaky clean, then I would probably avoid it if I got a bad feeling from somebody.

What are some pandemic resistant or recession resistant real investment strategies? You know, at CA South Development, Richard, we’ve been focusing very heavily on multi-family and industrial. And I think those two asset classes seem to be the ones that are going to fare the best because of the Amazon effect, because of e-commerce, because of – industrial is just hot and there’s just so much movement from retail to industrial in order to support all those goods that are being shipped and purchased online. All those things need to be stored in last mile distribution facilities, so that’s a play that we’ve been very aggressive at developing in and around Nashville. Multi-family, of course, is the darling. Everybody loves multi-family, everybody has loved multi-family for 20 years so there’s nothing new there. That you just have to be really careful about it not getting overbuilt. So, if everybody loves an asset class they tend to build more of it than is maybe justified to the market, so you just have to be careful there. But other than that, I would say that those are the ones likely to be recession resistant. As well as, surprisingly, suburban office. Suburban office, like low-rise office buildings, anecdotally from what I’m hearing from brokers are becoming more and more popular. So people don’t want to be in a super tall skyscraper office building; they want to be in a 2 or 3 story office building where they can walk up the stairs, or don’t have to share an elevator with a ton of people, that is also something else that I would definitely keep my eye on. I think it’s something very interesting, and I also think it’s something coincidentally we happen to be developing as well in a suburb of Nashville.

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Richard Wilson

Richard Wilson

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