601: Why Most Architects Fail as Developers (And the Keys to Succeeding) with Jeff Krieger of Krieger Architects: Otter Voice Meeting Notes

601: Why Most Architects Fail as Developers (And the Keys to Succeeding) with Jeff Krieger of Krieger Architects

Enoch Sears1h 9min

Speaker 1

00:00

You gotta be all in on the financing and the schedule, and have to make it a high priority. This is not something for a hobbyist. Hello

Rion Willard

00:10

and welcome to the Business of Architecture. I am your host, Ryan Willard, and today I have the great pleasure of welcoming Jeff Krieger to the show. So Jeff has been a boa for a number of years. He's been involved in some of our smart practice programs, and he has a very impressive career spanning nearly four decades. Jeff has mastered every facet of the architectural process, from concept design to detailing project management and construction oversight. His portfolio boasts an array of award winning commercial, residential and institutional projects, both in the United States and internationally. In 1997 Jeff established Krieger and associate architects, following formative years at renowned practices such as venturi Scott Brown and Associates in Philadelphia, a registered architect since 1985 Jeff has also devoted over 35 years to shaping the next generation of architects as a design studio tutor at Drexel University, alongside his active involvement in the governments of numerous charitable organizations, as a native of Pittsburgh, Jeff drew early inspiration from the powerful forms and structures of the city's iconic steel mills, an influence that has left a lasting imprint on his approach to design. Today we delve into Jeff's extraordinary career, the lessons he's learned along the way, and the reflections of nearly 40 years at the helm of architectural practice, and most specifically in this episode, we actually talk about Jeff's venture into development, what happened becoming an architect developer. We look at the debt stack that he used. We talk about the financing. We talk about the acquisition of the plot, how he found the land. We look at all the challenges that he faced, and we look at the the end numbers and the very valuable lessons learned from doing such a project, both as the architect and both wearing the developer hat. So this is a really important episode, I think, for anybody who is looking at embarking on the adventure of being architect, developer, Jeff is very candid here about the challenges that he faced, the challenges that he would meet in a different way, and some of the mistakes that he made and would do differently next Time. So really, valuable podcast here. So sit back, relax and enjoy. Jeff Krieger, now a message from our sponsor, Why settle for switching between multiple design programs to complete a single project with Vectorworks architect? You don't have to simplify your workflow with a hybrid 2d and 3d modeling environment made to support your work, from the pre design phase all the way through to construction documentation in a single platform. Learn more about the tool that can help you accomplish everything you need with the free seven day trial of vector works. Architect, get started here@vectorworks.net forward slash, Business of Architecture. It's time to announce this month's 200 304 100 club. If you missed our episode on the 200 club, listen to boa Episode 485 to learn more about this new initiative for benchmarking small firm performance. So a big congratulations to our 200 club members. We've got Marina, Rubina, Ramiro, Torres, Julia Aria, Philip Liang and Sean Kaki, Christopher Rawlings, Jorge, catran, Denise, Bucha and Yos bende yogis, Mistry Andre nemechech, Ina buella, Brad Smith, Brad Hubble and Susan Daly, Georgia, giras, Chris Driscoll and Judy and Larry April in our amazing 300 club, we have Mark Elster and Christopher Brandon. And our 400 club members are Drew and Justine Tyndall. So keep up the great work to everybody in the two 304 100 clubs, and we'll be back next month. We are looking for architect developer stories for the Business of Architecture podcast. So are you an architect developer with valuable insights to share? We're always on the lookout for passionate voices in the industry to join us on the Business of Architecture podcast, if you're ready to share your journey lessons, strategies with our global audience. We'd love to hear from you reach out to us to explore being a guest on our show and help inspire other architect developers on their path. We'd be interested in hearing your story, whether you're at the very beginning of your development story, or whether you have. 100 Million Dollar Portfolio of projects already in the bag, completed. We'd like to hear from you if you're working with the developers, or that you've developed a number of small houses, or you're working at a larger scale. Jeff, Welcome to the Business of Architecture. How are you? I'm

Speaker 1

05:19

good. Ryan, thanks, and it's a pleasure to be speaking with you.

Rion Willard

05:23

I'm very excited to finally have you on the show. We've known each other for for a number of years. You've been a boa and one of the BOA cohorts for a while, and we've worked together closely. You've also been involved in previous podcasts, such as the one that we did at about the same time last year, when we were talking about development, which is going to be one of the main focuses that we talk about today. But you are the founder of Krieger and associate architects. You've worked at practices such as Ventura Scott Brown in Philadelphia, you've got 40 years worth of experience in practice. I know you've taught studio design as well as at Drexel University.

Speaker 1

06:11

That's right, we just had our full final reviews last Saturday,

Rion Willard

06:15

so a pretty comprehensive career in architecture. And you know, you've got that the business wisdom as well to back it up. And you're always, always, always a fountain of knowledge to speak with. So we can talk a little bit about about the practice. And I think one of the main focuses that we want to go into today is the the lessons learned from from your excursion into architect, developer. So welcome to the show. And perhaps we can, we'll start talking a little bit about your own your own practice, and you could tell us how you you got, how you got started with your own practice. And then we can move into talking a little bit about why you decided to do this development project and what and what was involved. Okay, great.

Speaker 1

07:09

So, like many small firms, the genesis was during a recession, and I was laid off from working at venturi Scott Brown, and at the time, this was the early 90s, there were no architectural positions available. I was probably the last person laid off after having worked on the Sainsbury wing in the National Gallery for a number of years. Ah,

Rion Willard

07:40

very good. Very good. I know it well,

Speaker 1

07:43

yep. And after having worked at a firm like venturis, it, I just couldn't imagine another local firm that I wanted to work for. And even if I did, there weren't they weren't hiring. So I always wanted to have my own firm. My father ran his own company from time he graduated from college, and I just decided that since there were very limited other options, I would start working on my own. And after a few years of being in the basement and drawing everything myself, I finally developed enough of a clientele to hire a few people and move out and been building building a generalist practice ever since.

Rion Willard

08:38

And tell us a little bit about working for venturi. Scott Brown, I mean, this is one of the sort of you know most in one of the one of the most important practices of the last 50 years, 100 years or so, pretty prolific in terms of ideas and architecture and and influence in the architectural world. How was their business run?

Speaker 1

09:01

Well, it was an incredible place to apprentice. They were working on projects across the globe, getting published. Everything they touched was deemed to be important by the Architectural Press and cognoscenti. And it was just a thrilling place to be. You know, the level of attention to detail was amazing and probably not replicable in very many firms anywhere just the time that was spent fretting over the tiniest detail was remarkable, and the staff that was there were. They were all highly qualified and all very supportive of venturi Scott Brown's ethos. Bob venturi worked all the time there. We. There was very few hours when we were there and he wasn't there. So we never felt as though we were being taken advantage of, even though we were working pretty long hours, because, because he was always there. And, you know, there was a competition in a way, to get Bob time, but it was, it was the highlight of my, my early career,

Rion Willard

10:25

amazing and and in terms of them, like, how they were winning work, or kind of, I mean, obviously they were, you know, pretty extraordinary in terms of their ideas. And how they how they communicated, and how did they win? What were they? Was a lot of competitions,

Speaker 1

10:49

or a lot of competitions. I'm sure you're very familiar with the Sainsbury wing competition and the Prince Charles's interventions. Well, yeah, because

Rion Willard

10:59

we had Richard Rogers obviously had a very interesting design that was poo pooed by Prince Charles. And

Speaker 1

11:07

so it was through competitions, and also just through college presidents, like patrons, in a way, I mean, so they started getting work at Princeton, where Bob had an undergraduate and graduate degree, and that just just led to more and more university work. So, but a lot of it was, was through design competitions, right?

Rion Willard

11:44

So when you set up your own practice, what was your kind of ambition? And obviously, you've got a beautiful portfolio, a lot of amazing kind of private residences that you've you've done over the year. But what was your ambition? Did you have an architectural vision or a or a business aspiration?

Speaker 1

12:06

My business aspiration was to pay the bills. Okay, when I first started, we had a our first child and the second one on the way, and so really, I wasn't thinking any further than paying the mortgage initially, the architectural sort of inspiration, or was Just to do really good quality design work that was complemented with technical prowess and detailing.

Rion Willard

12:52

Now you you recently embarked on doing your own development so kind of wearing the hat of architect and developer and kind of doing a spec home. And this is probably one of the most popular aspirations that we hear from architects around the world, is they want to be developers, and there's and for obvious reasons, a kind of client free project being financially rewarded for your hard efforts. It makes sense. And also, I would make the assertion as well, that architects, in a kind of broader sense, are actually very good at being able to be propositional, in the sense that an architect can go and look at a site and can think of a very good program for how that site is used as part of our, you know, that's part of our our training and the architectural skill set, whereas usually, in real practice, we're kind of given a very pre defined business agenda from a client, which we then have to fit into. And that's often where there's a lot of kind of friction points. Yeah. So let's before we go into the actual development. In itself. What did you how, because you, because you, you did it recently. So clearly, there's a long period where you didn't do it, yeah. And so what was the reason why? What took you so long to get your feet wet into doing it, and where did you feel you had to get the business to be able to do it?

Speaker 1

14:27

So Ryan, I'd say development was something that I had an interest in from a relatively early age. And when I say that, I mean in terms of starting working in an architectural office, not as a young child, and I almost bought a building in Pittsburgh where I went to work after college. And I think, like I looked at it, I thought about it. I wanted to do it, and I was just too risk averse at the time, and it part of it was due to just lack of capital to undertake a project which would have been very modest, but relative to my salary at the time, that it was just deemed to be just too risky, right? And that's what I think. One of the themes you'll hear as we continue this conversation is the risk versus reward, yeah, and I just kept an eye out for properties that might want to be developed. And it seemed like whenever I got the itch or the urge to purchase a property and do a development deal, I didn't do it again, because I was just fairly risk averse, and then there'd be a recession. It was like pretty much a predictor that that if I got serious about becoming a developer that was a clear sign that that a recession was right around the corner. Okay? And so, after going through a few business cycles and not pulling the trigger and then seeing seeing that, I would have taken a complete bath. I decided for a number of years that that it just wasn't in the cards for me to play developer, that it wouldn't end Well, yeah, one and it just an opportunity came up in 2020 just very unexpectedly, and I thought to myself, without, without a lot of thought, really, just okay, you've wanted to do this for the last 30 some years. You've shied away. You're in a better financial position today than you've ever been in before. If you're going to do this, now's the time. And I made a somewhat impulsive decision to do bid on a property that had been brought to my attention by a local realtor,

Rion Willard

17:20

and so was it a vacant a vacant lot, or like something that

Speaker 1

17:28

Just a couple blocks from our office, there was a house with an extra, separately deeded lot that the sellers were putting up for sale. They hired a realtor. The realtor was a good friend of mine, and she contacted me to find out if there were any encumbrances on the lot, and could it, in fact, be developed and sold separately and developed so I was put in touch with this property with the intention of just saying, look at the zoning code, and yes, it's a buildable lot. Or you know what, it's really you can't build on this due to local local zoning restrictions. And I did the research on the zoning and determined that it was a buildable lot. And when I called the realtor back, I said, Yes, you have a buildable lot. Because she just wanted to determine what the value was or the lot and the house, and obviously the value would increase if the lot were buildable. I told her, You have a buildable lot and I'd like to buy it. I Yeah,

Rion Willard

18:43

great. Now it your, your kind of practice experience up until this point has been largely residential, so I'm assuming that, like the kind of design aspects of it, there's a whole professional aspect of this that you were just feeling very, very comfortable

Speaker 1

19:03

with indeed. I mean, we've done a lot of educational and institutional projects as well, but the primary focus for the last dozen years was custom residential and we've done a lot of renovation, addition work in in and around our immediate neighborhood, and new builds up and down the East Coast.

Rion Willard

19:23

And so what sorts of things were like, a kind of risk or a challenge that you've seen as an architect working with developers or new build house builders in the past that you were kind of making sure that you wanted to avoid?

Speaker 1

19:42

We most all of our residential work was for end users. We really didn't, didn't do much development work, so I wasn't that attuned to what could go wrong from the developer side on, on residential work. We had seen this happen. On some commercial, institutional projects where the developer just, you know, runs out of money before the project is completed. But that really wasn't a concern of mine, since I was going to be the developer, I um, the bigger concerns were just about finding the right builder and controlling the cost to turn this into a profitable venture.

Rion Willard

20:37

And how had you set up the finance, was it something that you just been putting money aside for, and you had it all ready to go in terms of savings, or did you have to leverage it as well?

Speaker 1

20:50

Leverage for sure, though, as I said earlier, was a pretty impulsive decision to put in an offer, and there was a bidding war that went on because this was, this was fall of 2020, and it's very, very active time in the local real estate market. So I didn't really think about how I was going to pay for all this when I, when I submit an offer, right? So, I mean, I definitely leapt into this without a lot of research and development, or I didn't have a pro forma. I didn't, didn't do anything. It just like, at that time, the mindset in our community and many places in the states Was that you, you couldn't help but make money in real estate development at the time, like house flipping was was a big deal, and it just seemed like there was no way that that you could screw

Rion Willard

21:56

this up. So this is, this is early 2020, so COVID had just kind of come onto the scene. Yes, yeah, this was fall of 2020, okay, so they've been lockdowns and all the rest of it. And so everybody was kind of sitting at home thinking about how to make the house better. Basically, exactly Got it, okay? So to walk us through, then the bidding process and then what happened once you actually won the won the bidding process and and got hold of the lot, what was the the next kind of set of processes and and concerns and realities that started to set in? Okay,

Speaker 1

22:33

so I was the high bidder. I had to pay more than I had intended to get the property. And then I had a house to sell, because I had to purchase the house and the lot and sell the house. Very lucky that that all happened in a matter of one month. So now I own a lot. Got it. So

Rion Willard

22:57

you had to do, you had to, you had to split the lot. It

Speaker 1

22:59

had. It was separately deeded, but it was sold. I got a single transaction. Got it so I had to sell the house next door, form an LLC to own the lot. And now I own a lot. And I'm beaming, and I'm like, I'm going to do this. Yeah, and the reality of how to pay for it and what to design had yet to sink in. So we started that fall, coming up with some initial design studies, and the LLC hired my architectural firm to provide design services, and we went through a number of iterations. The biggest challenge, I would say, initially, was determining what the program should be, because in all of our architectural experience. We were always working for clients who had dictated the building program. Now you have, you are the client, right? And it's one of the sort of frustrating and fascinating things about being a developer, is that you dictate what gets built too, or the design team,

Speaker 1

24:25

and you have to figure out what your market is and

Speaker 1

24:32

who your most likely buyers are, and are they young professionals? Are they family with four kids? Are they a couple that's recently sold a big home and wants to downsize. So I think that was the first big challenge. Was just getting my arms around who's this for?

Rion Willard

24:55

How did you kind of wrestle with. What the intention of the project was, it was about was, was money the priority in terms like, we've got to make, we've got to make sure that this turns a profit, or was it something else where you saw value in it as being like, you know, you've now got some freedom here to be able to do your own program, and you could lead your own architectural agenda, which could then feed back into being a kind of case study or a show piece for the practice.

Speaker 1

25:27

It was really both, I think, simultaneously those two things were being weighted fairly equally. It was definitely a monetary incentive. You know, if you go to a job site and you look at the automobiles that the team drives, you've got the architect in the, you know, the beat up old Subaru, that contractor who's driving a brand new Ford f1 50 pickup truck. And then you got the developer who pulls in in this BMW 750 M series. So it was, I mean, it was no question, there was a monetary incentive to this, this whole thing, and but it was also, as you said, just as you said about sort of being in control of the process and also having a learning opportunity, right? We've spent our careers being told, in essence, you know what to do by clients, and now you are the client, so you get to make the decisions about the program, about what you're going to spend, where you're going to how you're going to allocate those limited resources, and I thought there'd be an awful lot to learn from being on the other side of the table that I could apply to the architecture practice.

Rion Willard

26:56

How did you the relationship between new LLC that was going to be the development company and your existing architecture firm. How did you structure that relationship to make sure that nobody was losing out? Because obviously you could, I'm assuming here, you could do the work either at cost or for free from the architecture firm, but then the architecture firm is still incurring, you know, you're still incurring costs. You still got to pay the team members to do it. How did you kind of work that out as a balance? Was it something that then the LLC would take on as a cost and then would pay the firm back when they did the sale of the property? Or essentially

Speaker 1

27:36

the latter. I had conversation with our accountant, and I learned about the term self dealing. So because I, at the time, was 100% owner of the architecture business and 100% owner of the LLC, there's IRS guidelines about what you can charge between the two entities, right? So the LLC hired the architecture business, the payments were deferred until the sale of the property, and architectural services were provided at a reduced, substantially reduced billing rate in accordance with IRS guidelines,

Rion Willard

28:22

got it, okay? So you couldn't, so the IRS, like guidelines, wouldn't allow you to do the architectural work for free. It

Speaker 1

28:29

couldn't for free, and we couldn't charge $500 an hour either.

Rion Willard

28:33

Gotcha. Gotcha. Okay, so there's a kind of formula there, in in in place, and a contract in place. But, but then, effectively, the architecture firm is working at risk, in the sense that if the if the project doesn't make a profit, then there's no fee for the firm. Correct?

Unknown Speaker

28:52

Got it? Okay?

Rion Willard

28:55

So what happened? What happened next? You've got the you've got the LLC, you've got your agreement in place. You're kind of now starting to figure out who essentially is going to be the target market, and so was, was the idea for the property you were always going to be to be a flip, to build and to sell, or did you think that maybe it could be better off as a kind of long term part of a portfolio where you'd be renting it?

Speaker 1

29:20

It was always designed to sell the carrying costs turned out to be too high to for a rental, right?

Rion Willard

29:31

So it was in terms of property taxes or just all of it,

Speaker 1

29:36

just the rental income would not have offset the cost to build the project, right?

Rion Willard

29:44

Okay, so you would have been too leveraged, and your monthly monthly payments on the Yes, stuff wouldn't have been fulfilled by that, right?

Speaker 1

29:52

Got it. So one of the cautionary tale. Here is that after the fall, when I had all this excitement about, okay, I'm doing this, we came up with a program. The idea was to design a house that could suit many different age groups and family dynamics. The house had to be fairly vertical because a lot was quite narrow. One example was we designed in an elevator shaft that would reach all four floors. There's a two and a half stories plus a full basement. And so elevator shaft that if somebody in their 50s or 60s moved in and they had an elderly parents, they could stay there, or if people wanted to just live there and till the end of days, they could and had any mobility issues, there was a elevator shaft already framed out to access all four levels. So that was the sort of thinking behind the program was just to provide a lot of flexible space that would accommodate any number of age groups and family formations. But back to the cautionary tale. So our office got really busy in 2021 and which project do you think got shunted aside in favor of other higher paying, your more demanding clients? Yeah, your project, right. Okay, so it sat for a while, and that, in hindsight, turned out to be not a good strategic move. But we did pick up the design later and permitted it the following fall, so fall of 2021, and that was when COVID was in full force and effect, and they had it extremely difficult time getting getting the city to approve the zoning and building permits, simply because they were understaffed and non responsive. Everybody was working remotely, and the permitting process was just an utter disaster through no fault of ours. It took us almost seven months to get a zoning and building permit for a single family residence that required zero variances, right?

Rion Willard

32:37

And so the delays, firstly from your own kind of putting it on the back burner because you were, you were, you were busy, and now with the zoning, what was the impact of those delays and that? Because obviously this is now a new experience for you as the as the developer, and obviously this is the developers. We know that it's happening for developers, and we know that it's important to them, but now you're getting the first hand experience of it, what was, what was that like, and what, and what, what was the impact, what was that, what was actually happening,

Speaker 1

33:08

right? So at the time, there was really no way to tell that, that there would be adverse consequences to a lengthy time period between acquiring the property and putting it for sale. Sign out front, right? But it's probably a good point in this talk to say that there are certain things that are outside of your control, and those can sink a project, or they can, they can work to your benefit. In my case, they they worked at an extreme disadvantage, because what happened from the time I purchased the property to time I brought it to market was it interest rates more than doubles, and the residential market just completely froze. So the delays in getting a building permit set together and then getting it permitted and then getting it through construction delays as well. Not not major, but the end result was that by the time I put that For Sale sign in the front yard, interest mortgage rates had gone from 3% to seven and a half percent, not, not in my control, but had a deleterious impact upon the pro forma. Can

Rion Willard

34:35

you walk us through a little bit about the the debt stack that you were using? Yeah, how you were, how you were leveraging, leveraging it, what, what kind of different loans you had, and how the interest rates then impacted them, right?

Speaker 1

34:48

Sure. So this is a big part of anyone who's contemplating doing, doing real estate development in almost any scale, is that you, you are paying out money. Money before you're getting any money returning, right? So either you're willing to use your nest egg, or your inheritance or or your Bitcoin proceeds, and you have the cash on hand. I mean that that is the ideal scenario where you don't have to borrow money from from an outside source, okay, but most of us are not in that position. So you're likely to have to borrow money to pay for the lot, to pay closing costs, to pay the construction cost to pay your consultants so forth. And in my case, I self financed probably the first quarter to a third of the construction costs, and then I took out a home equity loan. We had a lot of equity in our house at the time, and that home equity loan was, you know, reasonable interest rate until I had paid for about half of what the total cost would be, and then I had to take out a construction loan to pay for the balance of the construction cost, and that construction loan, by the time I started pulling money down from the loan, was at about a 10 and a half percent interest rate right, and I was racking up 1000s and 1000s of interest charges every month. So that's that's when you start waking up in the middle of the night and asking yourself, What the hell are you doing?

Rion Willard

36:52

Yeah, and I guess as well, at the time that that point in COVID as well, you've got that. You've got the complications with supply chain and building material costs just unfathomably increasing each week.

Speaker 1

37:09

Yeah, yeah, we kind of hit the tail end of some of the supply chain problems, and the right lumber pricing had spiked, and then come back down again. So that wasn't we didn't end up spending a massive amount of additional money on the construction cost, because we didn't actually start construction until fall of 2022, at that point, COVID stuff, it settled down somewhat, but it also, again, another one of the delays was in finding a builder and structure in the builders contract, because the builders there were really, really busy coming out of the shutdown. In was early 2022 all construction was stopped, and residential construction was stopped in our area, but when it resumed, then all the builders got incredibly busy, and so it was another several month delay in getting a builder under contract.

Rion Willard

38:13

So so with the project, then you've got your you've got a quarter of the finance in cash, you've got a home equity loans, you've remortgaged your house to pull money out of that and to finance this, and then you've got a construction loan on on top of that as well. So there's kind of quite if we're all in at this point. Yes, it's and so you didn't think about going in with with another partner or another architect, or it just wasn't.

Speaker 1

38:48

I thought about it several times, but I just decided that I didn't want to dilute the the proceeds of the sale, sure, and I didn't want to have to answer to somebody else, and I had the ability to to pay that loan back from the from the proceeds, provided that the house sold, you know, quickly, and the realtors had all encouraged me and said, you know, you'll have no problem selling this house for for a profitable number.

Rion Willard

39:27

Got it. Okay, so in terms of the working out your kind of the gross development value at the end of the at the end of the process, how did you work that out? Was that based on real estate brokers advice, or did you guys do your own what kind of research were you able to do?

Speaker 1

39:48

So I did a pro forma and estimated all the most of the costs. I learned later, there were a few line items that that I didn't know about, and worked with a. Realtor to establish an outsell price, we worked pretty closely with the realtors. We showed them plans. We took, got their input about number of bedrooms and whether or not there should be a one car, two car garage, etc. So so that, in essence, was our market research was working with a local realtor who had the pulse of the neighborhood, and that's how we came up with the sales price. Got

Rion Willard

40:28

it, and was this all part and parcel of the sort of package that you were then presenting to the banks for either the home equity loan or the construction loan?

Speaker 1

40:40

Yeah, and they did their own appraisals, right as well. But because I for the construction loan, I was only borrowing a fraction of what the total cost was, I didn't have any difficulty getting that. Getting the loan, got it, got it. Okay,

Rion Willard

40:56

so you're, you're deep into the project has been delayed. You've now got kind of tricky zoning approvals to to be navigating around. When did you manage to get on site and and what happened next?

Speaker 1

41:14

We started digging in, I think, fall of 22 and things went pretty well. There were a few unforeseen conditions that we had to contend with, because this lot had been vacant since 1901 and there were some 19th century buildings in the vicinity, with some remnants underground, but nothing, nothing terribly disturbing. And, you know, the build went pretty smoothly. And that was one of the most enjoyable parts of the whole project for me, was I was on site a lot. I had that enthusiasm that I had as a young architect, seeing like your first design being framed. And so I was there, you know, I stopped by every other morning and take pictures and chat with the crew, and that was that was just exhilarating to see this thing come up out of the ground and get framed and topped off and closed in and just every step of the way it was sort of reminded me why I became an architect.

Rion Willard

42:35

Did you find that actually, that now the process, like the actual design process, was streamlined in a way, in terms of you know what you needed for, for contract documents, or any you know, because you're so much more involved in it, from that client perspective, did it make the architectural process any more streamlined, or was it still the same sort of amount of information that you'll be doing

Speaker 1

42:59

for similar but slightly less, less detailing. But, you know, we still had to hire structural engineers and work out coordination issues with the HVAC systems and but we probably detailed it a little bit less. I subbed out all the interior cabinetry, and sometimes we would have done that ourselves, right? The set was probably not as many sheets had, had it been for an end user close

Rion Willard

43:33

in, you mentioned earlier that there was a number of line items that you you hadn't taken into account in your original pro forma were these things that showed up in the in the construction, or later on,

Speaker 1

43:45

a few in construction, more had to do with like the cost of getting a construction loan, right? Okay, so the actual cost of the finance itself for the financing was something I had really underestimated, not not just the interest rate, but the fees and the points and the recordings and fees, and they're just, there's so many little, little things that went along with acquiring that construction loan.

Rion Willard

44:16

Can you walk us through a little bit about that, the those, those sorts of fees and how they end up getting calculated, or is it something more that you just, you just realized that you've paid for them. And when you look at the the spreadsheet at the end of the project, you're like, Whoa. I think that's

Speaker 1

44:29

they came up as we went. You know, we had, there's permits, additional permits that we didn't know about, that typically the subcontractor would pay for like, you have to close the street to do a water line connection, right? And so with you have to pay the water department. Well, that's normally born by one of our contractors or subs. We don't always see that charge. But now that bill is coming to the um. Uh, the like crane rentals,

Unknown Speaker

45:04

right?

Speaker 1

45:07

You know, I essentially had a cost plus agreement with the builder, and I paid the so this may be of interest to your listeners. I was able to negotiate a deal with a builder whereby I paid the builder a fee to manage the project, but I paid all the material bills and subcontractor bills, so that brought my construction card way down.

Rion Willard

45:40

Was he doing the purchasing? Or did you have to do the purchasing?

Speaker 1

45:42

He did all the purchasing, but I paid all the bills, right? So none of the none of the cost, ran through his books, right? Okay, right. So he was essentially paid a management fee. He's like a construction manager instead of a contractor. So he didn't have a markup on labor materials, so that that drove my construction cost down significantly. But finding somebody who's willing to work that way is not easy, yeah, but that prior example like we had to rent lifts to get drywall up to the second and third floor, and one of them broke down, so we had to get another lift and just dumpsters. It just goes on and on. There's all these things that you see on a on a application for payment that right don't necessarily register the same way when you're the one paying the bill. Yeah, got it, yeah.

Rion Willard

46:47

And so now you're doing every, every last little piece of things that the contractor would normally just kind of absorb in his overall right cost. You're, you're kind of, did it still work out cheaper? You're doing it the way that you

Speaker 1

47:01

construct one cost turned out to be very low relative to what we would have paid, what one of our clients would have paid a bill to do the same job. Yes.

Rion Willard

47:12

And is that typical for the developers normally do that? Or they would. They normally do a kind of standardized contract with a GC.

Speaker 1

47:21

I think they probably tend to do standardized contract. But this also gets to the issue at scale. So this was a one off project for me, yep, and there was one house, so there's no economy of scale to a project like that, and it's going to be more expensive than if you're building four townhomes, or if this is the first of several projects, And you can lock in various vendors and subcontractors to drive down some of your costs. So we did very well on the construction cost, but there was also a delay towards the end and that that feeds into the timing issue, and the fact that the whole job just took, took quite a bit longer to finish the project than was desirable, given the fact that interest rates were going up pretty much every every week.

Rion Willard

48:32

So when did you complete the build and what were the next steps after the project was actually finished? Because that sounds like now you're now, you're home, and, you know, just getting it finished is an enormous success, and right? So, like,

Speaker 1

48:47

there's like, um tunnel here. The build was finished in the summer of 2023 but not 100% completed. So we, actually, we had an offer in August of 2023 that was very close to asking price, but it was contingent on completing the project by a certain date, and it was pretty apparent to me that we weren't going To make that date again. This is back to those things that are outside of your direct control or what can bite you. So we lost that buyer. We may not have come to do a deal regardless, but the builder had some health issues and had to take some time off. And so just like the way, a punch list always drags on and on and on at the end of any project, we couldn't complete the project until probably fall of 23 80 and put the house. But the house was, at that point, was on the market. Had been on the market for months. And one thing, you know, we thought this was going to be a slam dunk. The Realtors kept telling me, No problem, you'll make your sales price. We put it on the market in the winter of 23 No, I'm sorry, spring of 23 and finished construction, fall of 23 only had that one serious offer. And what I heard from the realtors, you know, essentially was, well, nobody will buy this house until it's done right. People just don't have the vision to look at a house foundation or framing and say we're moving in. So even though we listed it early to try to try to see if there was somebody out there who wanted a new construction didn't happen. We lost that one bid in in August of 23 finished the house the fall of 23 and it sat. It just sat and sat, and I ended up taking it off the market in the fall, in the winter of 23 I put it back on the market in the spring of 24 which is supposed to be the you know when, when the market unfreezes and Everybody's rushing, you have to buy a House, uh, drop the price and no action. Ouch. So it wasn't until I took it off the market again we get went through the spring season. Didn't have any serious offers we had. We had one that somebody we kind of went back and forth with, but they just weren't serious. I took it off the market again the summer of 24 because nobody's buying real estate in the summer around here, and was about to put it back on the market in September, coincident with the Federal Reserve lowering interest rates, and we got a call from another realtor who had heard through the grapevine that this house was for sale and was about to go back on the market, and that's who we ended up selling to. Right? We closed October 30 of 2024, but at a much reduced sales price, which turned visions of profitability into a harsh reality of a financial loss.

Rion Willard

52:48

Ah, so after all of that, you was it a catastrophic loss, or was it something that you were able to easily, kind of weather or and and looking and looking back on it, what would you have done differently? Well, Ryan,

Speaker 1

53:04

it wasn't catastrophic, and it wasn't an easy loss to absorb. Somewhere in the middle there. What would I've done differently? So I mean, that's really that's the key question here, isn't it? For anyone else who's who has an interest in this. What are the lessons learned?

Rion Willard

53:23

As I alluded to, I mean, I mean, I mean, firstly, congratulations, because you, like you, did it, you've you completed the the entire cycle. And that's, you know, I mean that, in itself, is an extraordinary, uh, accomplishment, and, you know, and very courageous as well, in a business, in a business sense like you took on a project, and I imagine there's enormous amount of business lessons learned from indeed,

Speaker 1

53:48

my wife would not use the word courageous. However, I think terms of lessons learned, I mean, as I alluded to you, gotta be all in on the financing and the schedule, and have to make it a high priority. This is not something for a hobbyist, right? Simply because time equals money, and if you find yourself in an environment where interest rates are rising or for whatever reason, the housing market is declining, you're screwed, I mean. And so the best you can do is get through it very quickly, and if you lose, you lose, but at least you've minimized the adverse impact of external factors. So I think that's one key thing that I would do. The advice I would impart to anyone else thinking about this is, you know, unless you're going to do a small scale, you know, rehab, and you're doing the work on the weekends, and it's going to take a couple years, you know, anything in a larger scale, where you're talking about hundreds of 1000s, if not couple million dollars of cost, you really have to be committed and make it, make it a priority, and just pray that the economic environment is in your favor. Are

Rion Willard

55:37

you able to share with us some of the some of the numbers like how much the the total construction cost was, what your projected gdv was going to be, and then what you actually ended up selling it for, and what the what the end loss was,

Speaker 1

55:53

sure. So the original asking price was 2.2 5 million.Construction costs ended up to be about 1.2 5 million for hard costs. Uh, soft costs, well, at the acquisition of the lot, was probably about 250,000 so this is like 1.5 million before soft costs. And my soft costs probably were about 300 to $350,000 somewhere in there, and that includes the realtor commissions at closing costs at sale, etc. Architectural and engineering fees, utility bills and loan interest, gotcha,

Rion Willard

56:51

and what was the the value of the plot by itself? Because you had to make that. That initial acquisition, you bought the you bought the next door, neighboring property. You sold that and then you had you were left with the plot,

Speaker 1

57:05

the sale, the purchase and sale of the property next door was kind of neutral in tons of dollars and cents. But as I said, I think I pegged a lot acquisition costs at about 250,000 right. Okay, so my all in cost, lot, site, utilities, hard cost, soft cost, financing, everything bundled together, it was probably about 1.8 5 million. The sales price went from 2.25 down to 2.1 down to 1.895 and we settled for for something less than that. So,

Rion Willard

57:47

so originally you were looking at your auditing costs are about 1.8 you were looking to sell at 2.5 so looking at making 2.1

Unknown Speaker

57:55

sorry, 2.25

Rion Willard

57:57

2.25 okay, so Yeah, little after under half a mil was the right,

Speaker 1

58:02

when I was the uninformed me that set thought that this would be about $400,000 worth of profit, right, which was, you know, not, not, not extreme, but For a first effort. I thought this would be great. This is this is way more money than we're gonna make in a couple years in our architectural practice. But I ended up losing a little over 100,000

Rion Willard

58:34

gotcha. Gotcha. So would you do it again?

Speaker 1

58:40

I would but I would be at the risk of having my wife break most of my the bones in my fingers. I learned a lot, and so for that, it was a very positive experience, and I truly believe I can parlay some of those lessons learned to the architectural practice, yeah, be able to talk to a client with it in a different way, with a different perspective. I under now I understand the decisions that the clients make, the stress that a project puts them under, the financing options that are available. I that I think that's valuable. What it again, as I said at the intro, it's really all about risk and reward. And was the reward worth the risk? Doubtful, doubtful. But that was because the outcome, if it had been profitable, I would be looking for another property right now, you know, just, you know, it's an alternate source of income for architects, because we are all aware that architectural practices are difficult. Multiple entities to run at a high profit margin, and we know a great deal about most aspects of the building design and build process. So in some ways, it's a natural thing for architects to take it on, but you've got to have an extreme risk tolerance. I definitely felt the stress of getting a statement from the construction loan entity saying, all right, this is almost interest. We have to pull out of your reserve this this month. And it was, it was keeping me up at night. I mean, so that's something everyone has to weigh, is just, do they have the appetite in the stomach for something that could potentially be far riskier than just the risk involved in running an architectural practice?

Rion Willard

01:00:57

Yeah, but it hasn't put you off the idea completely, though

Speaker 1

01:01:01

not completely. No, no. I mean, there's just, there's a kind of a juice to the whole process, and yeah, being the person in control as a project and working on the numbers, and there's a certain element of deal making to the whole thing that I found sort of engaging and exciting, but the downside risk is is high. And, you know, the real estate market here is still not really unfrozen. So, yeah, I think the if any of us had the foresight to predict what is happening in your local real estate market, then I think you're in a far better position to make the determination as to when to when to jump in or when to get out,

Rion Willard

01:02:04

it's, it's interesting in, you know, with the there's the financial loss, but there's a lot of business lessons that have, kind of, you know, you've gained some very valuable experience, both from, you know, understanding the perspective of, you know, developer clients or even residential clients for that matter, like you know, you know what they're you know, you know what they're, what they're dealing with, and the stresses that they're that they're dealing with. Has that changed anything in the architecture practice, like how you might deal with clients or services that you provide?

Speaker 1

01:02:37

It hasn't changed the services we provide. But I do mention my experience as a single family real estate developer when we're seeking new residential work, right? I think there is a marketing advantage there to say that we've been in your shoes. Yeah, we know what you're dealing with, we would know better what your concerns are,

Rion Willard

01:03:05

and did the project fulfill on, say, some of the architectural intentions that you wanted to be able to explore and communicate. And has become, in itself, an architectural case study

Speaker 1

01:03:17

to a certain extent. You know, I probably did not design the house. I would have designed for myself, right? I was not. This was not an exercise in getting published in the, you know, or getting design awards. It's a it's a very attractive building. And has a lot of great functionality built into it. I'm proud of the outcome, but I didn't go into this as a ego boost project, because for me, the risk of doing that was higher than I was willing to take on, because the house I would have designed for myself, or for the design awards or for would was would not have been as well received in the local market. Yep.

Rion Willard

01:04:18

So we would have made, made the made the sale even more challenging, exactly,

Speaker 1

01:04:22

right? Yeah. So we were going for a very broad swath of potential buyers, as opposed to that that, you know, special person who really is looking for a high level of design,

Rion Willard

01:04:35

is there, going back to the very beginning of the process with the actual acquisition of this of the lot, is there anything you would do differently there? Because you mentioned at the very beginning that you were the, you know, you were in the bidding process. It was kind of quite spontaneous. And I know a lot of developers there. They front load a lot of their strategies with the kind of, you know, below market value acquisitions of site. Saw lots and properties and things like that is a different, a different strategy that you'd employ at that very front end to kind of protect the back end,

Speaker 1

01:05:07

not at that time. I mean, you have to recognize that in the fall of 2020, houses in our neighborhood were being listed on a Thursday and sold above asking on a Sunday, right, right. So it was either be aggressive or watch, watch it get snatched by somebody else, you know, but the whatever I spent over and above the original asking price for the house and Lot was not significant in terms of the overall financial performance of the project. I didn't spend crazy money buying it, but you know, if you want to, you know, if you can find it was still a deal, I will say. But they're, they're virtually zero lot in in our neighborhood, we're in a very highly developed urban community, and to find a lot to build on is happens maybe once or once or twice a year.

Rion Willard

01:06:19

Yeah? So it's, yeah, not easy. They're high around

Speaker 1

01:06:23

10 pieces, yeah. It was like, Okay, this, everything is aligning here for you to buy this lot. Yeah,

Rion Willard

01:06:33

brilliant, excellent. Well, that's perfect place for us to conclude. Jeff, that's so insightful. The kind of behind the scenes of what happens and the sort of lessons learned there for an architect working in development. So thank you very much for being on the show, and that was absolutely brilliant.

Speaker 1

01:06:58

Oh, thanks, Ryan. I appreciate the conversation, and I hope that I have both inspired some other people to take this on and told a tale that they cause others to pause and decide this is just. This is not for me.

Rion Willard

01:07:15

I look forward to having you back on when you talk about your second project. Okay,

Unknown Speaker

01:07:21

that's great. All right, thanks, Ryan,

Rion Willard

01:07:23

and that's a wrap.

Enoch Sears

01:07:25

Hey, Enoch Sears here, and I have a request, since you are a listener here of the Business of Architecture podcast, Ryan and I, we love putting this podcast together. We love sharing information as much as we can glean from all the other industries that we're a part of to bring it back, to empower you as an architect and a designer. One thing that helps us in our mission is the growth of this podcast, simply because it helps other architects stand for more their value spreads the business information that we're sharing to empower architects together, so architects, designers, engineers, can really step into their greatness, whatever that looks like for each individual. And so here my my simple ask is for you to join us and be part of our community by doing the following, heading over to iTunes and leaving a review of the podcast. And as an expression of our sincere thanks, we would like to give you a free CEU course that can get you one professional development unit, but more importantly, will give you a very solid and firm foundation on your journey to becoming a profitable and thriving architect. So here's the process for that. After you leave us review, send an email to support at businessof architecture.com let us know the username that you use to leave the review, and we will send you that free training. On the training, you'll discover what 99% of architecture firm owners wish they would have known 20 years ago, and the other 1% well, they just didn't even know that. They didn't know head over to iTunes and leave us a review

Rion Willard

01:09:07

now. Now a message from our sponsor, Why settle for switching between multiple design programs to complete a single project with Vectorworks architect? You don't have to simplify your workflow with a hybrid 2d and 3d modeling environment made to support your work from the pre design phase all the way through to construction documentation in a single platform. Learn more about the tool that can help you accomplish everything you need with the free seven day trial of vector works. Architect, get started here@vectorworks.net forward slash, Business of Architecture, the views expressed on this show by my guest do not represent those of the host and I make no representation. Promise, guarantee, pledge, warranty, contract, bond or commitment, except to help you be unstoppable.

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