How to Invest in Commercial Real Estate

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Episode #028 - Starting your DEVELOPMENT - You have a piece of land and an idea, What now?

by Criterion, Braden Cheek, Brian Duck
March 24th 2021
00:19:59
Description

Today we have Tyler Detring with Ascend Construction breaking down when the best time to involve your general contractor when you are doing your first development. We have our hosts Brian Duck and ... More

if you just call a random, do you see and say hey I want you to come to a meeting once every other week and I want you to provide your input, I want you to do all these things and then maybe we'll get a job in the end, you know there'd be a lot of maybe like no we're not doing that but that's kind of going back to the relationship we have of um you know making sure that you know I have your best interest in mind and you have in mind as well. There's a lot of trust that goes into that of hey I'm hoping you don't, you know, come at the end and screaming and then that's what break and I are doing. I know mhm Master hey what's up guys welcome back to another episode of how to invest in commercial real estate. My name is Brandon with our co host brian and Joel and today we have a special guest Tyler Dietrich with a Sin Construction. Um he's been working on a project with us now for a year or two. Super excited about that will release it soon. But anyway, Tyler tell us a little bit about yourself and ascend guys.

Yeah, so my name is Tyler featuring I own a Sin construction um you know we, we focus on small to medium size um ground up and renovations and yeah I'm just super happy to be here, appreciate you guys. Absolutely here. So I think on today's episode we're gonna focus on development, you know you've got a piece of land, a lot of people love the idea of development. You know we're gonna build something cool we're gonna build something fancy whether that's multi family housing whether that's a renovation or some sort you know a lot of people or into that and you know when when do you get a contractor involved? What's the first step you know um how do you kind of get off? You've got your piece of land? Let's let's assume you've got a piece of land you've got an idea. Um But that's as far as you've gotten to you when when do you think of D. C. Ought to be involved? Yeah So it's you know I think it's really important to get a G. C. Involved early on and you know there's a lot of reasons for that um You know G. C. Can kind of help you um kind of keep costs under control. I mean architecture super important as well but um you know we can kind of talk about that as well but architects a lot of times can inflate that cost for in the design.

Um So are you thinking you get you you you sign up the G. C. Before the architecture the architect you sign him up and get some drawings and and then get the G. C. Involved or what what's your opinion on that. You know it can go different ways but if you have a good relationship with the G. C. You trust it's great to get them involved really close up front, um you know, but a lot of times they it's good to have them both at the same time, and the reason is, is, you know, an architect is their job is to draw the most beautiful building, and they're really, really good at that. Um But a lot of times they're not great at thinking, practically about what makes sense for the client that we're working with, What are the costs for certain materials in the industry at the time? For sure. We've had some luck with GCS, we're working on our first development and that the GCS, they bring cost saving ideas to the architect and it's kind of a blend to try to get something that looks really cool, but also is practical to build. Yeah, for sure. It's it's super important, and um you know, we've dealt with that several times already, it's just they have these ideas of what works best, and yeah, we would love to do what works best, but sometimes um you know, we don't have to build the Taj Mahal on this one, maybe later, we'll have that in our budget, but right here on this project that budget does not allow those really, really high end finishes.

Um So it's just good to always have that mind in mind, and most of the time of G C is going to be thinking practically, because, you know, they want the project to be done, You know an architect they get paid up front so if the project doesn't happen it's it's really yeah they're still gonna get paid but general contractor most of the time doesn't get paid a dime until you know you get boots on the ground. So they're very interested in making sure that the project happens because you can spend a lot of time on a project that never happens for sure done it tons of times we've spent hundreds of hours on projects and you know then it just falls apart. It's you know it dies that design which is the worst nightmare for everybody. So what you're saying is you're trying to help make sure that that project happens right by keeping costs under control. No doubt so uh you know on brain and are we we came up with a budget of this office building we wanted to do and we knew what it had to be to to work. Um What what when can you come up with uh your budgeted costs and see if if what we budgeted can actually can actually work.

Is that, yeah that's a good question happened. That's a good question. So you can make a budget at any time. I can make a budget off a sketch on a piece of paper but um the more information that's provided the more accurate our budget can be if that makes sense. So um okay in that regard it makes me think that an architect needs to be involved. Absolutely. You can give budget numbers but it can only be accurate if you have you know civil engineers, structural engineers, mechanical engineers and an architect working on those designs. Some of the challenges that we faced in our first development that we're going through right now is all of what you're saying is true. Um But you know if you don't have the design done in the civil done then you really can't get an accurate cost. Well then how do I how do I really evaluate which G. C is going to be most cost effective because they all have different oh no overhead structures and you know employee costs and all of that but I need I need that person to help me with the design with the architect and civil to make cost effective but then I also haven't picked one yet so I don't know if that's something that you run into.

Some. Yeah that's a great question. So there's a lot of different ways to do that. One thing you can do is um interview GCS get three or four G. C. S that are, do the type of project that you're trying to build um and you can talk about fees, what's your overhead rate gonna be um If you guys establish an overhead rate let's say it's 5 to 7% whatever it is you say ok, our overhead is gonna be 7% and then from there you're just bidding out the project to the subcontractors And whatever the subcontractors cost is. The mark up for the G. C. is at 7%. Um So cost plus what kind of I mean Yeah it's it's more of a kind of design build construction manager format. Um I'm not in favor of cost plus for a couple reasons but yeah it's um I think that's a great way to do it is to interview, see who you feel good about. Um Get references from them, see if they've been successful in the sector in the market that you're building and then um you know, establish negotiate what that market is going to be.

Yeah. Do any of the GCS employ architects where you it's just one company. Uh There's some there's there's not a ton to do that. Um The other, there are a couple. Okay you probably have to be on the larger side. Maybe. I would think that that might be a pretty good enough projects to keep architectural time. Yeah. I definitely think it's a relationship interviewing process um with not only the general contractor like yourself but the architect, you know, everyone's time is expensive. Everyone has a specialty and you know like you said you can create a budget at any time and you're gonna send people fancy drawings that look great. Probably won't be the final materials. Probably won't be the final building at all and everyone's gonna bid it. Super high, super low, they're gonna be in a different way, they're gonna bid it with different formats. Um the architect, you know, kind of the kind of the same thing, they just, it can be a process or it can be super short. So if you know exactly, you know, we've done um our kitty academy developments, we know exactly what we're doing when we acquired a piece of land, the buildings completely drawn, we know our our partners know exactly how much it should cost.

So we're doing a fixed cost bid, it's not cost. Plus we say, hey, this building costs $4.5 million to build, have fun. And if, you know, there's a massive would spike or a steel spike or something like that, they're covering it. So there's a bunch of, there's a bunch of different ways to do it. What's your preferred uh structure with an owner, as far as a g sii type contract? Yeah, I love the design build and project management, um project manager style, where we establish negotiated overhead costs, and um and then at the end, once you do get a set of plans, then the competitive part comes from the, the subcontractors competing with each other and they're gonna drive the cost down and that the overhead rate stays the same and, you know what, that cost is going to be, and then in the, in the end, you know, you're still gonna get good value because the subcontractors are competing against themselves and driving down that cost because, you know, a design bid build, which is when you just work with an architect and then you sit it out, send it out to bid for general contractors.

You know, they're sending it out to their subs and the GCS are competing with each other. You know, there's some things you have to look out for in that in that arena when you're doing they're more risk for the G. C. And that and that scenario there is there, I mean there's risk for everybody um you know, there's people who love that style and there's people who don't, it's, you know, it's you know, we we operate under that as well a lot but definitely preferred is to be working from the beginning and established our relationship. We really, really want to have a great relationship with who were working with. Um So when do when do you start charging if you do that scenario where you're charging an overhead for the size of the project? Yeah. You know, in our experience and what we have done is it's not until we get boots on the ground and we've started actual construction um unless we have unless it's a true design build and we've brought the architect to the table then, you know we are a subcontract or the architects actually a subcontractor for us and they're so they would be building us and we'd be paying them, but yeah, but as far as if, you know, an architect and the GCS brought to the table at the same time, then GCS not getting paid until actual construction starts.

So, you know, that could be a big risk for a G. C. And think it's advantageous though, for the owner of that scenario, for sure to get to get the advice and the consultation of a G. C through that process and not be on the hook to pay until you actually get going and, you know, and that's gonna be hard to find, to be honest. Um because if you just call a random, do you see and say, hey, I want you to come to a meeting once every other week and I want you to provide your input, I want you to do all these things and then maybe we'll get a job in the end, you know, there'd be a lot of, maybe like, no, we're not doing that, but that's kind of going back to the relationship we have of um, you know, making sure that, you know, I have your best interest in mind and you have in mind as well. There's a lot of trust that goes into that of, hey, I'm hoping you don't, you know, come at the end and screw me and then that's what Break and I are doing, you know, yeah, we're not gonna do not plan on screwing to you, but screwing you, but we, we uh, we asked you to 10 meetings and everything else and it's, it's, yeah, we're gonna have to make sure that that building happens.

You know, the big, the big thing with development, right, is it's a big risk for everyone. It's for everyone. It seems about the architect because there anyway, it's a big risk for everyone because everyone's spending a massive amount of time. Everyone's and nobody knows if it really is going to happen. Nobody knows until the loan is fully approved, the equities, fully funded. Um, you know, you've got a complete set of permits, you've got a complete set of drawings, which is, uh, it's all insanely expensive and time consuming. So like, like you're saying you've got to focus on the relationship and I think that's kind of, the theme is, you know, you've got to be interviewing people, you've got to be spending time with people and, and checking it out because you can't just go, um, I don't know, it seems like there's some massive, massive pitfalls, you know, somebody could just be under bidding the crap out of this thing, you know, hey, this is, this is going to be 20% under, even though they know once they get the project it's gonna, you know, they're gonna change order the crap out of it, you know, maybe that's it or, you know, there's gotta be some other major that leads us into the next question I had uh first of all this is we're new at development, you're new at the time.

New development, we're figuring this out. But what what somebody told me before I got into it and I'll tell everybody listening is it's gonna take longer than you think and it's going to cost more than you think. Uh And those have both come true for the project that we're doing now. I think the project still gonna be great and still gonna go but keep that in mind. But as Brain was alluding to what are from a G. C standpoint, some of the risks or pitfalls that owners can run into. You talk about preconstruction or during construction either yeah. You know preconstruction. Obviously the worst thing that could happen is you can get to the end of the project doesn't happen right? You pay a ton of money, you put all this time in, you put all this energy and resources and then the projects out of budget for whatever reason with that almost happened with the one that we're working on because I I was under the impression that lenders we're gonna do a certain loan lTv interest rate and was really assured of that almost given even a term sheet from lenders and then when it came down to it uh they backed out and I couldn't get anywhere near the L.

T. V. That I wanted and it almost killed the project right there. So that's a, that's a good example of real life. And we were, we were in quite a bit of money. So what, what's next? Yeah, I mean, you know during construction there's as you guys know tons of things that can, you know, come up. But you know, one of them is things not included in the bed like hey I didn't have this included, you know, or things not being installed properly or things not being installed per prints or um materials that are not what was called for in the Prince. Those are all really, really things that can cost tons of money. What about not being properly insured or bonded? And then they, you start losing money and you just bail for sure as a as a g sii and then your left trying to hire somebody else to come in. Yeah, I mean you, you hear that happens sometimes, but yeah, material escalations a problem because I've been hearing for the last 56 years, materials are always going on, you know, on the, on the big project we're working on right now um you know, we got a contract from the owner Probably one January and you know, it's kind of been going back forth of the city were finally able to send out contracts to the subcontractors right now and the project starting right now and um unfortunately since that time materials have gone up and I, I hate having to go back to an owner and tell them that's one of my least favorite things in the world to do is say, hey we're gonna have to increase it by this much.

And um that's my least favorite thing in the world, but I know everybody's least favorite. Nobody, nobody has a good day on those days. But you know, um make it hard for you to try to give someone a budget and try to anticipate what the escalation is going to be then, because that can make your bid for sure. Not as competitive as someone who doesn't do that if you're just doing strictly a uh bid a hard bed, that's um you know, it is definitely risky for everybody, you're having to get hard numbers from subs and say, hey, this is pending. Um any kind of raising increase in materials. Um you know, we're hoping that the material increases have kind of leveled out a little bit, but it's just tough to tell and hopefully it goes down and, you know, I talked to my steel guy and he's like well, you know, you could try to hold off on that project for six months and see if the see if it's gonna come down. I'm like no, like it's you can't it's a tough game to play because what if it goes up or what if it gets harder to get it just right. Yeah, it's just it's a crazy game, you know, materials are an issue.

But you know I think the bigger issue is more of making sure you trust the G. C. Making sure that that D. C. Is um someone who you want to work with and who you know of people who have worked with them and and you know that they're gonna do a good job and at the end of the day there's gonna be honest and they're gonna take care of what they say, they're going to take care of and they're going to do a good job. That's big. I'd say for a G. C. If I'm picking one, I want someone that's gonna see it as a partnership. And so they're they're going to forego maximizing profit on that one job for for future jobs that they're going to get with me? Uh Not that they have to take a loss on it, but that helps at least us negotiate a fair way to resolve some of those issues and and further to that, like you know when change orders come, are they going to kill you on change orders? Because that's a lot of time where they're going to kill you because they are earning under contract, they can charge you whatever they want on that change order. So do you trust think about yourself before you sign up with that G. C. Do you trust that person when that first change order comes and they say they can charge you whatever they want uh If I'm negotiating my own contract with uh G.

C. I'm trying to put some formula in there. Absolutely that that controls and says hey if we disagree it has to be verified by a third party or something and and that should be negotiated upfront of in a contract saying hey you can only charge 10% overhead on change change and that that has to be in place because if it's not, you know, there's a lot of dishonest GCS that will charge you as much as they want. So yes. So at what point do you need to have a G. C. Identified and you know, get that contract started, you know, at what point do you need to stop interviewing and Really? Yeah I think I think as early as possible in the design process because like for the issues we talked about earlier you have them the more um more issues that they can help identify through the process that can kind of help identify potential and current issues that are there with the design. Yeah I agree with that. I mean you've helped us a lot in developing our budget and making sure we don't get out of hand and keep us all under control.

I agree. So as we kind of wrap up um ascend construction, what is it that you uh focus on just for the people that are watching? Are you doing? You know, $3 million? $10 million. 500,000. Yeah. So we're really focusing on. You know, we're We're trying to raise our minimum minimum project. We're trying to be in like the 200,000 to about $5 million that's where really good and that's where we want to kind of stay for the time being. And it was that a lot of retail office building? Yeah, there's there's a lot of retail, you know the past year. We've done a couple of restaurants more. Then we had one. We've done a little bit of marijuana and that's are You talking ground up or just like 10ant improvement construction? We're doing um ground up and tenant improvement. We would like to do more um Kind of lean more towards the side of ground up because we love these um We love these developments. We love working with the architect and the owner from the beginning and helping them design and um that's what we love at. And so we think we're good at.

So that's where we want to be. Yeah. That's awesome man. Well um make sure to check us out like and subscribe if you want to get a hold of Tyler's shoot us an email. Um We'll put you in touch with them. Tyler do you have a website or people? Yes. Um I Sinned okay. Dot com And uh emails. Tyler Addison Dok dot com man. All right, so um thanks. Thanks for watching. Thanks for stopping by um I would suggest you definitely get in touch with the G. C. As soon as possible based on my perfect not perfect previous experience then even. I mean just little stuff like those like stupid little remodels or just little jobs. It's such a relationship thing in the bigger stuff. If you can maintain one relationship and if you can get out there making those relationships and give them smaller jobs, you'll probably trust him a lot more when it comes to the bigger jobs anyway. Thanks for watching. Thanks for stopping by. We'll see you again. Mhm. Yeah. Yeah.

Episode #028 - Starting your DEVELOPMENT - You have a piece of land and an idea, What now?
Episode #028 - Starting your DEVELOPMENT - You have a piece of land and an idea, What now?
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