It's Always Something

Like Roseanne Rosanna Danna on Saturday Night Live used to say at the end of her rant ...

"It's always something".

In Real Estate you never know what will be the most important thing in driving the profit in a specific project or in bringing the project to its knees. In this newsletter I will give you the benefit of one of my learning experiences.

In any project where you are the developer

or plan a major remodel on an existing structure

you are involved in a delicate four-part balancing act.

During the Due Diligence period you have to answer four main questions.

[Remember to lock the property up on a contract BEFORE you do this amount of research]

Strike the Balance

#1 What looks good on the proforma

When you plug in what you know about project costs and product sales comps, do you make enough money?

#2 What you can get permitted

Can you get building permits for what you plan to build without spending too much time and money?

#3 What the bank will lend on

Is the bank eager to lend to you when they see the project details?

#4 What will sell

Will what you are building sell for the price you need in a reasonable time frame?

Remember, Your Sales Team Holds the Trump Card

Nothing else matters if you can't sell what you are building, remodeling or buying.

- It might look good on the proforma ... show a ton of profit for not very much expense

- It might be a project the city Planning Department is excited about and will sign off on

- giving you the permits you need

- Your bank loan officer may be saying "looks great" and ready to write the check.

- AND your sales team may tell you there is no demand for that same product.

All looks good on paper, but you won't be able to find buyers. You sit there blubbering ... all the work you have put into the deal ... but, it will make a profit ... but, the city is happy to give us permits ... but the bank says they will give us the loan.

And your sales team just sits across the table shaking their heads.

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A (VERY) Personal Example: "It's Always Something"

My team just spent several months researching an Office Condo buildout project in Phoenix - the hottest office market in the country.

We were buying a parcel of land with an approved master plan from the city.

- The layout and footprints of the 6 buildings were approved and set to go.

- We spent dozens of hours creating detailed 4 page proformas showing good profits as condo sales, as lease and hold and lease and sell.

- The bank was ready to lend on our package ... everyone was smiling.

Then we sat down with the sales team and they did the unthinkable...

They told us the project was essentially doomed and that they couldn't sell it the way it was designed.

WHY??? ... we cringed.

As Gilda would say, "It's always something"

In this case It Was the Parking.

The city code called for 4 spaces per 1000 sq ft of building. That is how the site was approved.

AND our sales team knew from bitter experience and two failed projects that we needed 5 spaces per 1000 sq ft. In this project it meant creating 35 more parking spaces out of thin air.

The sales team learned this on projects parked at 4 per 1000 where the first 75% of the project is sold quickly and the last 25% took years and repeated price cuts to sell.

Why ???When the buyers for the final units rolled up to check out the buildings THEY COULDN'T FIND A PLACE TO PARK !!

[BTW, if you ever are in Phoenix and can use Cavan Commercial's services, I can't recommend them highly enough]

Bottom Line:

We passed on the project even though

- The proforma looked outta sight

- We could get the building permits easily

- The bank was enthusiastic

Because if it won't sell, you don't have a project - you have a VERY expensive lesson.

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Always remember to check with your sales team early and often

and let them know all the project details.

Having learned from this experience, just guess what I look at first in any development deal or existing building I look at now? You got it ... how much parking does it have.

Remember 5/1000 and have a great week.