Today’s episode is another AMA episode.  Today’s question comes from BJ in Raleigh North Carolina. He sent me quite a detailed package of information that is far too much to cover in a single episode. However, I will summarize his project and give my initial reaction based on the information provided.

BJ is looking to assemble five different parcels of land into a single large development site for a multi family apartment complex. His question relates to how he should best negotiate with the five independent landowners, hoping to make the land part of the equity contribution to the deal. Presumably that would reduce the amount of capital required and would have the benefit of allowing the landowners to participate in the future value creation of the apartment complex. 

First of all, congratulations BJ for having the guts to consider a project of this size. Larger projects have the benefit of providing enough value and enough cash flow in order to afford all of the necessary skills you need to pull it off. Having said that, large projects also represent more risk. Larger projects come with larger problems.

While there are many aspects of this project that I could provide comments on, I’m going to zero in on three items.

  1. Undertaking a project of this size requires that you have the right experience team working with you. You can still be one of the principals of the project, but you need to bring in people with significant development experience building multi family apartment complexes as partners in the project. 
  2. If the success of the project requires all five landowners to agree to similar terms in order for the project to be successful, your chances of success start to drop very very quickly. Complexity, is the enemy of any project. The land assembly process can be lengthy, and the negotiation can be difficult. Sometimes, it is simpler to raise the money and buy the landowners out. However, you only want to do that once you are assured that you will be given the entitlements that you require. You want to negotiate a deal with the landowners whereby you offer a lower price today that is a reflection of the as-is market value for the land, or a higher price once the entitlements have been granted. Land that is entitled for an apartment project is worth substantially more than land which is being used for agriculture. By keeping the negotiations with each of the sellers simple and straightforward, you increase your chances of success. Also want to look at the minimum land assembly required for your project to be viable. That may not require all five parcels of land. You might be able to get away with only three parcels. Yes it will be a smaller project, but it will also be simpler.
  3. The third area that I noticed in the information you provided is the construction budget. I am currently building a project of similar size and scope in another state. However, construction costs in North Carolina will not differ materially from other locations in the south. When I look at your construction budget, it seems quite low to me. If you under estimate the cost of construction, you are setting yourself up for failure. The definition of success or failure of any project often has little to do with the actual cost of the project. It has more to do with the expectations that were set at the beginning. If you set the expectation of too low a construction cost, you are almost certain to fail. My third piece of feedback on the construction cost is easily solved with my first piece of feedback which is to make sure you get some experienced apartment constructors involved as part of your core team.