As an entrepreneur and commercial real estate developer over the last thirteen years, I have learned a few lessons along the way. Some from success and others from failure or, what I choose to call learning. Failure is simply a temporary setback that shapes our current and future decisions, helps clarify what we want, and guides us toward our long-term goals. I advocate for mentorship, which can help minimize the most painful mistakes, although some are inevitable to discover through experience. I am thankful for these ostensibly challenging situations as they offer invaluable wisdom and define the goal posts of success (as we define it for ourselves).
Comparable culture is essential for strong partnerships - Choosing, or attracting, the right partner/s is one of the most important decisions we make; particularly for those of us with long project cycles. Qualifying the quality of emotional energy, behavior under pressure, alignment of long-term goals, complementary skills, and shared values are critical to rewarding, long-term relationships.
Stay inside the core – There are plenty of developers and entrepreneurs who make money on the fringes but, I have found that the velocity of capital and deal flow is much more consistent, over a longer duration (of the economic cycle) in the core of the apple. In real estate, that means, in the areas closest to the urban center. In entrepreneurial endeavors, it means creating products that appeal to a scalable market via a wide demographic and/or psychographic range.
Creativity = Capital – Some investors believe that money is more important and valuable than the creativity of the entrepreneur. While this might be the case in commodity investing with an oversupply of deal flow, in more creative endeavors, it takes both creativity and capital for a deal to succeed. Create the right deal structure to attract investment partners who are team players and equally value the investment in sweat.
Align interest with proper deal structure – Fee structure, preferred return (“pref”), and cash flow splits/waterfall are the general levers available to create a well-aligned deal structure. I generally develop and hold, which is essential to distinguish from a project built to be sold immediately upon stabilization. Long-term structures often value these mechanisms differently and can include buy-out clauses, unique pref structures, and waterfalls. A well-conceived deal structure will not bias a specific exit strategy. I will expand on this concept in the next post.
State your intentions up front – Have the hard conversations up front, especially with investors and partners. If you intend to hold a deal long term or have identified specific risks, state those clearly in the beginning. Investors are usually big boys, and they can decide whether the risk profile is appropriate for their portfolio.
Pivot sooner – If something is not working and you are pushing, take a step back and reframe the problem. Does your deal need more equity or a different plan? Does your product, brand, or positioning need to be tweaked to achieve optimal market fit? The line between the decision to persist and pivot is not always clear; do not be afraid to pivot sooner to succeed sooner.
There is more than enough – Investors and equity often end up dictating terms because entrepreneurs perceive capital as difficult to obtain. Be of the mindset that not only can you create a deal structure that is truly fair for both parties, but you will attract what you need. As you meet investors who are not the right fit (i.e. insecurity, bragging about how many deals they have invested in or how much their house or ranch cost), politely say, "no, thank you" and wait for the right partners to show up. There are plenty of deals and plenty of capital partners. There is no reason to feel pressure due to a false illusion of scarcity.
Last 3-4% of the budget creates the best return on investment – This is not always true in commodity and mid-market projects. My business is creating profitable investments at the intersection of sustainability and design. To rationalize quality architecture and interior design, I develop projects in prime locations, with premium rents, which allows room for quality finishes in "select areas" of the project. Please do not confuse this with overspending. You must carefully study the competition and distinguish what expenditures will have the most positive impact on the investment. In my experience, it is this last 3-4% of the budget that creates an immersive emotional experience to attract upscale tenants and clientele, who are willing to pay for the added value. Quality and price are synonymous; if you deliver mid-grade in an A location (assuming the market is not over saturated with upscale supply) you will never be able to compete for the price/rent premiums that accompany a certain finish level. I will expand on this in a subsequent post, although the primary elements to distinguish upscale, commercial design are building skin, glass, doors, floors, hardware, lighting, and select furniture items. The increase in asset value you can achieve with only marginal rent premiums will generally far exceed the initial investment and create your best return.
Selling is not about pushing a product or idea – It is about finding the right people who need and want what you have.
Do not count on uncommitted investors or lenders – Keep building your pipeline of leads and opportunities. Investors and lenders are picky and are not always forthcoming about competing deals they are considering, or the politics involved in obtaining a commitment for your project. Many lenders and investors have committees, and your champion within those organizations does not often have control over the final decision. It is your responsibility to qualify investors and lenders diligently, push for agreements, and continue pursuit of the right partners until your deal is funded.
Add 20% to your initial budget (35% if you are phasing the project) – Inflation is as real as death by 1,000 paper cuts. It is often not large budget categories that end up costing more than you anticipate. Rather, a series of smaller items add up to a large number. Add inflation during design and development, and you will almost always have a more expensive project than anticipated at the time of your initial budget. It is also challenging to project pricing and rental rate inflation that occurs during the explosive growth period of any economic expansion. Be realistic, although it is appropriate to assume reasonable inflation on income to balance conservative cost projections. Of course, the risk increases as the economic cycle matures. State your assumptions clearly to investors, and they can decide if they agree with your methodology.