The Bright Build Q&A

You've got questions. I have answers :-)

Hey, Bright Builders! Our first Q&A! Thanks to all of our subscribers for the thoughtful questions. Do you have a question you’d like answered and aired on The Bright Build? You can ask here.

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Transcript of this week’s Q&A

Sean: Hey everybody, welcome. Thank you for your questions. This is the first week of the Bright Build, my new newsletter’s question and answer session. I really appreciate everybody submitting their questions, and we've got a bunch of really good ones to look at to help you, on your way, to develop your first project, or help you, on your way, to continue to develop more and more, and better projects. So, we picked three this week. I'm going to read them and listen to them, and then we'll go through some of the answers and help you on your way. So, thanks again, really appreciate it, and thanks for being a member of the Bright Build newsletter.

First Question:

First question comes from Loredo or Lorado. Sorry, Loredo or Lorado, I don't know how to say it. My question is on raising and getting financing for projects. What point in the project planning do you start this, and at what part of the financing round would you start work on the project?

It's a great question. Most developers will tell you that, outside of getting approvals in difficult to develop areas, getting the financing and equity together, getting the money together, to do a project, is probably the hardest part. So, it's a good question and something that every developer and every aspiring developer really needs to know about. So, at what point in the process do you start this? Well, there's a bunch of different ways to answer that, but I think the best way to think about it is this. Can you go out and raise money with no plans, and no site, and no project? Probably not. Maybe, from your parents. Maybe, from a couple of buddies who know you want to be a developer and are ready to put money in. Is a bank going to give you a loan if you don't have a site, if you don't have an approval, and if you don't have a bunch of plans? No, of course not.

So, here's what you do. Initially, you can get soft quotes from banks. Once you have a site, once you've gone through part of the process, you've done some schematic design, you know about how big the building is going to be, how many units, you can scratch together kind of a brief pro forma. You can call up some local lenders and introduce yourself, let them know who you are and what you're trying to do. And, just take their temperature and say, look, I'm looking to develop a 75-unit building at 3rd and Main. It looks like about a six-and-a-half return on cost. What kind of lending terms are you guys putting out on commercial real estate these days? Most lenders will give you a little bit. They'll give you a small bit of information. They'll say, hey, look, we're lending, a typical project, right now, 75% loan to cost. Our rates are X, and we're expecting this kind of return. That helps you understand where you need to be, eventually.

So then, you go through the rest of the process. You design your building. You get project approvals. Then, once you have project approvals and you've really started to dial your project in, you're in the, probably, design development phase at this point. You're putting the mechanicals, and the electrical, and the plumbing, all that kind of stuff in the plans. You have a real building. That's when you put together what we'd call the lender package. That's a package that you're going to send out, basically a sales pitch, that you're going to send out to anywhere from three to six lenders, depending on your experience level and your relationships. Once you become extremely experienced, you might know, you'll get to the point, kind of where we are, where we've worked with, on the 9 or 10 projects we've done, we've worked with just a couple lenders. So, we're not, necessarily, going out to 10 lenders or 6 lenders, anymore. We're, usually, just talking to a couple, as long as we can get the terms that we want. And, we have a good long-term relationship, which is important with your lender.

So, you go out to the lender and you put together this package. The package will, usually, consist of a few different things, a summary and, again, kind of, the sales pitch, why are you developing in this building? Why is it going to work? That kind of stuff. You'll put floor plans, renderings, all the guts of the building that you know. You'll put comparable properties. You’ll put your pro forma. You'll put your projections. You'll put, basically, everything a lender, it might end up being a 10 to 15-page packet, somewhere in there. It's everything that a lender can look at and know, really quickly, this is a kind of deal we want to lend on or it isn't. At that point, after that happens, of those six lenders, let's say it's a good market and things are going really well, you'll probably get a term sheet from most of those lenders, if they feel you have the capacity to do the deal. Then, you can compare term sheets, do a little negotiation, and pick a lender. So, that's, kind of, the point in the process where you’d do that.

You'd want also, obviously, equity is also a part of it. You want, as I said earlier, maybe, you get a couple of soft commits at the beginning, but it's, around this time, where, then, once you pick a lender, I, typically, we, typically, don't raise equity until we know who our lender is and what our loan is going to be because it's hard to show projections to an investor until you have a really good sense of what your loan is. So, that's when I would do it. Too soon, you're not going to get enough traction. Too late in the process, you're just going to be stalled and you're going to be waiting, and waiting, and waiting to get your loan in place, while you're paying pre-development costs and doing other things. So, great question, knowing when in the process to do it is key. And, I hope that helps you get where you're trying to go.

All right, we're going to move on to another question here. This is from Michael. And, we're going to go ahead and play the audio here, Michael. Thank you.

Send Question:

Michael: Hey Sean, I'm really enjoying the Bright Build. Love the newsletter. I'm looking forward to seeing where this virtual property you're developing in the newsletter is going to go. So, I voted for northeast for the build site. I tried it twice, but it wouldn't let me. So, here's my question. I'm in the Twin Cities, and I'm just now starting to explore neighborhoods looking for places to build. I've got a young daughter. I'm an executive vice president of strategy at a local company and my bandwidth is really limited. But, I have a dream of building. When you were looking at neighborhoods, how close to home were you? I jog in my neighborhood looking at potential sites, and I wonder if I'm limiting myself by not looking everywhere, if you see what I mean. I guess what I'm asking is, is it a mistake to look only where I live? Hope you get a chance to respond to this question, and thanks so much. And, thank you for Bright Build.

Sean: Michael, awesome question. Very, very, very important thing to think about, so great question, appreciate you asking it. And, thank you for the kind words about the newsletter. We're excited, and we're glad that it's resonating with you. So, to answer to your question, where should you be looking and is too close to home limiting yourself? The answer is yes, and the answer is also no. Two reasons I say that. One, the way you described your situation, Michael, you've got a great job. You're busy. You have a family. You don't have 20 or 30 hours a week to also be doing development on the side, at least at this point. And, looking for sites, you're going to have some limited bandwidth, as you explained. That's not necessarily a deterrent. The way I started was I was in a very similar situation, and South Minneapolis ended up becoming my, kind of, dream land, as we like to call it, at the Bright Build, because I had the same situation, young kids, limited bandwidth. And, I realized the only place I was going on a regular basis was South Minneapolis. So, I got to know every street, every corner, frankly, every site there. And, I knew what streets were good, what streets were more limiting. And, again, it was, kind of, out of necessity. So, for me, I lucked out that it also turned out to be a good place to develop apartments and the kind of stuff we do. So, that's the yes to your question.

The no piece would be if you're trying to do, example, urban infill apartment development, but you live in a far-out suburb where every site is an acre, every house is a car drive away from the other ones. And, it's not a place to do urban infill. No matter how much you drive around that neighborhood, or walk around that neighborhood, or, in your case, run around that neighborhood, you might not find a site that works. If that's your situation, then you, probably, do have to come up with a plan B. It's really important to match the location with the product type that you're trying to build. If you want to build a suburban garden-style project, and you live in an area that that fits well for, then you're in luck. It's fantastic. But, if you're trying to do urban infill and you live in Delano, for example, it might not work out as well.

So, it comes down to your personal situation, Michael. What are you looking to build, and does that fit with where you live? And, if so, fantastic. And if not, you have to find somewhere else. Again, I would find somewhere else as close as possible, though, especially in the beginning. You don't want to be two hours away from your dream land in the area you're looking at, especially when you're getting started, because every trip you make through that area is just more information for you. So, hope that helps. Thanks again for the great question.

We've got one more, and this is from my buddy, Donovan. Shout out to Donovan. What's up, man? Thanks for putting the question in. We're going to listen to it now.

Michael: Hey Sean…

Third Question:

Sean: We're going to listen to Michael, again. I'm just kidding. We're going to try Donovan, this time.

Donovan: Hey Sean, I have a question about getting quotes for construction. So, let's say you find a site that you like. You figure out how many of the approximate amount of units, the square footage, all that, 40,000 square foot. I don't know, 40 units, give or take. How do you go about getting a soft quote for your construction cost to put into your model, or to at least, kind of, run some numbers without, maybe, having the full set of architecture drawings? Do you ask for, kind of, a per unit basis, or how do you structure that conversation to get a realistic quote from the GC without “spending” so much money on the plans before it's even a real project?

Sean: Donovan, great question, man. It highlights something that I've talked a lot about online, on Twitter, and on other things, knowing the process of development. And, I think Michael and, also, Loredo’s question highlight this, as well. Some of these things that seem like obstacles or you're not sure what to do, that's where the education component comes in, going through the process, understanding it. That's where it's going to help you tremendously. So, that's why I keep preaching, learn the process, learn the process, learn the process. And, this is a great example, good question, right in the middle of that process.

So, what you do is this, Donovan, I hope you've been, as you're putting your project together in the early stages, you know that you're going to need a general contractor to build it. So, as you're getting started, networking with some general contracting firms, asking developers, calling me, calling other developers, and saying, hey, who do you use to build your projects, if it's a similar type of project? We'll help you out. We'll make those connections for you. That'll have any market, and this is universal advice, anybody in any market, for the most part, is going to be willing to do that for somebody who's trying to get started.

And, what you want to do is, a couple of those firms that you get to know well, at that point in the process, you pick up the phone, you call your contact and you just tell them what you're doing. Say, look, I'm at the point in the process where we think it's going to be about 40 units. We've got this much parking. They're going to ask you what type of building is it? Is it wood-frame construction? Is it five over one? Is it concrete? Is it a high rise? Give them whatever information you know, at that point. And, any good general contracting firm, especially when the market is strong, is busy with 2, 3, 4, 5, 10 projects. Most likely, they're building something very similar to what you're asking them about, at that point.

So any, any good general contracting firm can do one of two things. One, they can tell you, kind of, in that conversation, and most times they'll quote it in a per unit price. It's a little easier than a per square foot because that gets into complicating unit sizes and other things. So, they'll say, hey, Donovan, we're building projects like that right now about $200,000 a unit. So, you can take that back into your numbers and say, okay, I'm building a 40-unit building. It's $200,000 a unit. I know my hard cost construction budget is going to be about $8 million. In the beginning, when you're just getting started, it, definitely, wouldn't hurt to ask a couple firms just to get, because you might get one at 8 and one at 10. And, if you do that, you say, okay, well, now my build cost is, probably, more like nine, or it's somewhere in the middle of that. So, that's how you get, kind of, a soft quote in the beginning. Talk to a couple firms.

The other thing that they might say is, look, give me a week. They might, actually, go out and talk to a couple of subcontract, if they're not doing something very similar to what you're doing, at that time, they might take a week or so and gather a little data, and then get back to you. But, good firms will help you out with that because they know, too, they want your business. And, they know, if they can help you along, they might be the one who gets to build a building for you.

Secondly, later in the process, once you have a full set of plans, you're going to bid that out in the beginning to general contractors. They're going to be able to tell you, down to the penny, what they think they can build it for. And, especially, when you're getting started, you're going to want to bid out your plans to three or four firms. You're going to want to take those numbers, do side-by-side comparisons, try to get it as apples to apples as you can. The low bid, you might find out isn't, actually, the low bid when you actually compare the line items. So, you want to take the extra time, later in the process, to do that. But, early on, Donovan, just pick up the phone, call a couple groups, tell them what you're doing, a good firm will be able to give you a good number. So, I hope that helps.

That wraps it up. Thank you everybody so much for the questions. We look forward to doing this, again, sometime, soon. Thanks, again, for subscribing to the Bright Build. We love having you. Thanks.