Breaking Into Real Estate Development And Value-Add Projects

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Nick Simpson joins us today to talk about going big in real estate Nick is the founder and CEO of Mentis Capital Partners and has been involved in multiple commercial and residential projects valued at more than 50M in the greater Salisbury Maryland market including ground-up construction He currently leads a team of talented real estate professionals who specialize in student housing multifamily and opportunity zone investments Tune in if you want to know how they are gaining success in the large-scale development and heavy value-add space 00 01 – 05 42 Getting into Heavy Value-Add Deals Nick discusses the work they do in the 10 million range Using their experience in construction for heavy value-add How they pick properties and manage risks Finding opportunities The more deals that you do the more contacts you ll have Joining JVs 05 53 – 17 53 Scaling to Larger Developments The importance of local expertise Building a track record in the community Having a feel of what the local market wants Starting small before going bigger Nick breaks down their current project s partnership structure How they are hedging against the changes in the market Putting no escalation clauses on contracts and offsetting risks with suppliers 17 54 – 20 33 Closing Segment Nick shares the projects they have in the Southeast Reach out to Nick Links Below Final Words Tweetable Quotes Development is a whole another animal And before you get into it you really need to have local expertise – Nick Simpson There s so much more that goes to the development piece It s not something I would get into lightly You really need to have strong backing There s quite a bit of money that is required upfront You ve got to have a thick stomach – Nick Simpson —————————————————————————– Connect with Nick Shoot him an email at nick mentiscp com and follow him on LinkedIn Know more about his company at Mentis Capital Partners website Connect with me I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns Facebook LinkedIn Like subscribe and leave us a review on Apple Podcasts Spotify Google Podcasts or whatever platform you listen on Thank you for tuning in Email me sam brickeninvestmentgroup com Want to read the full show notes of the episode Check it out below 00 00 00 Nick Simpson There s no secret to getting to large-scale I mean if you look at any of these large companies who are getting it s very large developments you wind the clock back enough and whether it be second or third generation to go back to its origins probably was quite humble 00 00 13 Nick Simpson And just one after another after another getting started is always my biggest recommendation if you want to get into like we started with home building and you know obviously those are much more manageable bite- sized deals and you carry that forward and you can get into bigger stuff 00 00 29 Sam Wilson Nick simpson s an active real estate developer and investor focused on multifamily student housing and mixed- use properties Nick welcome to the show 00 00 49 Nick Simpson Thanks for having me Sam 00 00 50 Sam Wilson Hey man pleasure s mine Three questions I ask every guest to come to the show in 90 seconds or less where did you start Where are you now And how did you get there 00 00 57 Nick Simpson I started in Salisbury Maryland doing single family houses right after the recession One house led to two then three so on and so forth and then got into commercial and then multifamily And now we re doing a larger development and value-add deals throughout the Southeast 00 01 15 Nick Simpson And we are typically in the 10 to 50 million range And having a great time doing that 00 01 22 Sam Wilson That is awesome So the 10 to 50 million range what are you doing I want to hear the lower end of that number What are you guys doing right now in the 10 million range 00 01 33 Nick Simpson Sure Probably 70 to 120 unit complex is probably just a little bit above that might be a hotter market where you re getting maybe it s a little bit more expensive per unit but you re in a really good market And you might be you know paying 17 to 20 or 25 million And you re still getting around that 125 units Really you have to kind of balance between making sure you have economics and the deal to get the proper staff on site and oversight to it But I do think that you re kind of an area where maybe the institutional folks aren t quite pouring a ton of money and you might be able to peel one away and get a good deal 00 02 14 Sam Wilson Yeah No that makes a heck of a lot of sense And those are more than I would assume when your value add side 00 02 19 Nick Simpson Absolutely So those value add deals are typically heavy value add So you had mentioned where developers so we like to use our heavy value use our experience in construction and really to that heavy value add or heavy lift type of property 00 02 33 Nick Simpson It really means a large tenant reposition You re going to be getting in and doing a lot of the interiors but also the exteriors of the property And you know you might be doing foundation issues or fixing groups but we typically are doing that type of property It might scare away other people just because we have experience in getting it 00 02 51 Sam Wilson Talk to us about that How do you define or how do you find a project that you say Hey you know what because I mean a heavy lift or heavy value add comes with a lot of risk I would assume not I don t have any firsthand experience in this come a lot of risk I would assume because like you said you re doing a heavy not just the heavy lift but a heavy tenant reposition 00 03 10 Sam Wilson How do you pick a property Cause I think there s plenty of those properties out there How do you pick those that make sense and those that you re like Hmm no we can t turn this one but we can turn that one What does that look like 00 03 19 Nick Simpson I think it always starts with location and that s I think obvious you know the rule in real estate you ve got to make sure that you re kind of in the pathway of progress that you re not like the first project that s of that type getting into that reposition Maybe you re seeing some new product getting built nearby and then that kind of helps bring your comp set up the other part of that is when I say heavy value add I don t mean the property is in disarray completely I mean there s still people living there There is still a having robust enough cashflow to support making distributions to investors but also paying for the property management 00 03 54 Nick Simpson And I think it s that niche that we re looking forward It s still sustainable but with our large construction work that we do we really see a big pop on the other side 00 04 04 Sam Wilson Right Yeah You re looking for something where like you said it s sustainable It is you re able to turn it but yet it s still needs a lot of TLC such that you guys can then collect like you said on the other side So that sounds kind of like a unicorn deal I mean are those hard to come by right now 00 04 22 Nick Simpson No you know I think everybody talks about how difficult it is to underwrite deals because there s a lot of capital in the markets right now I think there s a lot of you know shift you know during the pandemic we saw a lot of shift away from the hotels and we saw the office folks coming into the multifamily space but I still think deals are out there 00 04 38 Nick Simpson It just comes down to a numbers game whatever your number is of how many deals you need to underwrite to get done And the more deals that you do the more contact you ll have that are going to be calling you about off-market deals how your bankers might have off-market options for your brokers are going to know that you can execute and slowly but surely you kind of build that pipeline 00 04 59 Nick Simpson And I think if you re really struggling to find a deal don t be afraid to do a you know a JV deal with somebody else where you provide a lot of value to that other person and do a lot of the work yourself But that way you re at least getting a deal done 00 05 11 Sam Wilson Right Yeah absolutely I mean that s something that again I don t specialize in multifamily at all but certainly if you have plenty of know plenty of friends and people like yourself that you know will call me with opportunities and I ll say you know do you want to help us with this 00 05 23 Sam Wilson Well sure By all means I mean if it s a home run deal it makes all the sense in the world Yeah I want to participate What I always say to to other people is like look if you re fishing in that pond Nick I don t need to go through another line in the water I just need you to call me when you ve got a fish on the line and I ll help you reel it in 00 05 36 Nick Simpson So that s exactly what we do Yeah 00 05 39 Sam Wilson That s a hundred percent I love that So that s absolutely awesome Talk to us about your development side and you told us a little bit about your value add project What are you guys developing right now And what makes you decide whether or not to go into a market and develop versus just look for existing stock 00 05 54 Nick Simpson Sure Well development is a whole another animal And before you get into it you really need to have a local expertise I guess really need to understand the local politics the local boards the local zoning rules What are the demand economic drivers you know is there going to be just this crazy unicorn law that you didn t know about is just going to kill the project 00 06 17 Nick Simpson You know Maybe your competitor has gotten past in the past like in previous legislation all of those things really matter deciding when and where to develop So we do our development in Salisbury Maryland where we have a lot of the local connections We don t really do any development multi states away but we have a really good set of contacts here where we can get our projects to move forward 00 06 43 Nick Simpson Those projects out currently are one s in the pipeline is multifamily really large scale and multi-family We have a student housing project that s currently coming out of the ground And in this market the partner is the owner of the general contracting company And they ve done hundreds and hundreds of millions of dollars in construction in our market and know all of the subcontractors really help control schedule and pricing 00 07 09 Nick Simpson And those things are really important I mean all the way from the day when you think about the idea to the day that you open the project in the student housing cases it was a five-year timeline before we actually opened the building There are so many things that can stop you and having the right people in the right seats is critical 00 07 27 Sam Wilson A five-year timeline I want to dig into that project I guess a little bit more But walk us through maybe even take it back a few steps on the development side Are these projects that people come to you and say Hey this is entitled we think you should take it and build it out Is this something where you guys go out and find the raw land get it entitled and build the project What s that process 00 07 49 Nick Simpson Well I think more people are starting to call us about projects now that they ve seen us execute on a couple of larger scale ones I think to start though we had to build a track record in our community and that Just doing houses in the beginning And then it was getting into commercial space and then it was multi-family space and not being a jerk to the building department you know the people who are issuing permits and making sure that the boards like the historic district boards and every time you re in front of those people you re building rapport with them So that when we came to this larger project called The Ross which is a 358 bed student housing project which is actually two buildings right in downtown one of which is the tallest building in our area It s like a 14 story building the other one s seven stories And it really turned into a pretty large complex in the downtown area And all of that took a ton of zoning And that was a lot of leaning on the local representatives to get those types of projects done 00 08 44 Nick Simpson But to answer your question more specifically on that project we had to acquire three separate parcels combine them together get the zoning for the height the density the historic approvals We had to keep some historic facades We actually ended up passing a tax law that had to go from local government state government 00 09 00 Nick Simpson Even the governor had to sign off on our tax legislation but it phases in our taxes over a 20 year period so it really saves you know really saves returns All of which was started because of the coronavirus If would get a gone without the coronavirus the product would ve been great But you know when you get stopped just got to figure out a way to make the deal work 00 09 19 Nick Simpson And that case we had already acquired everything And the coronavirus came out of left field and we decided to make some tax legislation that not only helped our project but helped other projects in the area continue to grow And you can kind of hear like there s so much more that goes to the development piece 00 09 34 Nick Simpson It s not something I would get into lightly You really need to have strong backing There s quite a bit of money that is required upfront And you know I think there s just a lot of opportunity in it You ve got to have a thick stomach 00 09 46 Sam Wilson Yeah you do And when I hear all of that and again I m not a developer 00 09 49 Sam Wilson I hear risk I hear you know a lot of heartburn and a lot of pivoting is probably what I hear like oh wait now it sound like you re constantly in flux trying to figure out the right way to get this done Is that a fair assessment 00 10 03 Nick Simpson It can be And that s where it comes down to your again having a feel of what the local market wants 00 10 10 Nick Simpson If you have somebody who s really tuned into downtown Charlotte development They might be able to quickly put together a project that s just going to check all the boxes and get through the zoning cook your timeline right Have all the contacts the architects and quickly there they ve got a development ground 00 10 26 Nick Simpson That s a pretty tight knit shop but there s probably not too many of those shops out there And that s probably our group here in Salisbury Maryland The new products we have that are coming down the line are pretty easy for us to get on the board But it takes time to get there And that s why we balance that out with a value add approach On the other side of the business that we re not all eggs in one basket especially the most risky portion of the real estate world that I know which is development 00 10 52 Sam Wilson At what point in time did you know for certain that you had a viable project You said Hey we re there This is going forward And you know every all systems you know go when did you know that 00 11 05 Nick Simpson I think you have to know that kind of early on And when you say all systems go I mean I think you re probably referring to the shovels going in the ground and you re closing up financing and you know investor capital s coming in Well I see it as not from the development perspective from our seat all systems were go and we started really investing in like the contract level documents or the blueprints for the property 00 11 30 Nick Simpson A lot of people don t realize you re doing larger scale development You can do millions of dollars into soft costs before you start and before you pull the trigger there I think that s when you know that okay zoning s in place We have a pretty compelling idea here We ve done some feasibility studies and checked it you know on appraisals and there s going to be a bank and good financial backing to it 00 11 50 Nick Simpson It can be quite stressful if you don t have those contacts in place and building those take time And again I think that s where starting smaller was probably critical for us If we hadn t had done multiple smaller projects in our area I don t know that we would ve been able to do the larger 00 12 06 Sam Wilson Yeah And that to me my question was how did you gain the experience on the development side to then have the courage someday to take this down That sounds like your answer 00 12 14 Nick Simpson There s no secret to getting to large-scale I mean if you look at any of these large companies who are getting it s very large developments you wind the clock back enough and whether it be second or third generation to go back to its origins probably was quite humble 00 12 28 Nick Simpson And just one after another after another Getting started is always my biggest recommendation If you want to get into like we started with home building and you know obviously we were those are much more manageable bite sized deals and you carry that forward and you can get into bigger stuff 00 12 45 Sam Wilson Got it Talk to us about the owner or your general contractor slash partner relationship How did you structure that and why did you structure it that way 00 12 56 Nick Simpson So we kept it pretty clean lines He has to wear the general contractor hat He still has to deliver the product on time and in the guaranteed maximum price 00 13 08 Nick Simpson But he also became an investor which included him on the general partnership and when he agreed to sign on the loan for the deal that really kind of gave us some additional comfort because that s a lot of risk that he s taking on saying yep I m going to deliver this project on time This is well within my wheelhouse 00 13 27 Nick Simpson This is something we ve done a hundred times before No problem We ve got it That kind of just organically happened What he first asked for was let me join the project just as your general contractor I d like to earn the business that way And that just happened to kind of blossom into more of a additional partnership 00 13 44 Nick Simpson And he s part of the general partnership Key members of that general partnership We have other partners as well pull down a large development deal but in this case it really I think was beneficial to have the full transparency on the construction side especially if what we ve got going on with the inflation and labor shortages and material issues that s our currently plaguing all the real estate 00 14 08 Sam Wilson What are you guys doing on that front A love that thank you for breaking that down I think that s kinda method before bringing the general contractor on as just an investor but in this case and it also loan guarantor that s a pretty strong bet on their capabilities or capacity to deliver you know I don t think there s fantastic way to structure that kind of really aligns incentive between you and the actual general contractors That s really cool I love that Talk to us though about the labor and materials shortage inflation I mean a five-year project gives you a long exposure to whatever in the world s going on and inflation right now How are you guys hedging that 00 14 45 Nick Simpson There s a couple of different aspects The construction period is about a 24 month period So we have a two year exposure on the actual construction And certainly from the day that we started this to now prices have gone up The good news is rents on the other side have gone up as well to offset a lot of it Right Trying to not count on that is the mindset I continue to keep everybody in Let s not count on a higher rent down the road Let s not count on interest rates coming back down because of a recession or whatever Let s just manage the problem the best we can right now As the a value engineer of the project let s take away things that aren t absolutely critical 00 15 21 Nick Simpson Let s not hurt the integrity of the building like what keeps thenoise qualities of the building good Let s give the waterproofing qualities top of mind We can maybe cut some of the frills maybe some of the finishes that are in maybe the lobby we can do more with better design and more flashes of color with paint rather than relying on a fancier floor or a marble wall of some sort 00 15 43 Nick Simpson We took a lot took a really close look at what we could do on the scope to dial it back We worked with our property manager to see what they were doing cause they re kind of a best in class developer in this case there s a student housing project so we re working with American campus communities one of the largest owners and operators in the country 00 16 00 Nick Simpson So that s kind of relying on the experts to kind of give additional feedback And then this is where we really rely heavily on that partnership with our general contractor who is locking in a lot of major subs like the HVC and plumbing we ve put no escalation clauses on those contracts So they must hold the pricing throughout the duration of the project 00 16 22 Nick Simpson And I don t think they would do that just for anybody on the street They re going to want some kind of guarantee that the product is going to be funded and they re going to be on schedule and they can count that this is going to be a real job that s going to be profitable for them provided they stay on on time and on track what you think our general contractor can do 00 16 40 Sam Wilson That s really interesting You re not putting any escalation clauses in your subs bids and I guess that s offsetting some of the risks from you to your subs Of course it s incumbent upon them to figure out how they re going to offset their own risk And you can t obviously fix everything downline but you can fix it on your own side of the equation it sounds like 00 16 56 Nick Simpson Do the best you can to take care of your portion of the deal And those are large company I mean these are not large multi-million dollar companies that have sophisticated people at them who can go to their suppliers and pass it along because the suppliers are giving a lot of difficulty back to them 00 17 12 Nick Simpson It s just right now it s a very interesting dynamic I think developers have typically been in the driver s seat just getting to bang the table and now make it cheaper make it cheaper And everybody was giving in Right That s not quite the case right now You might just have to accept the pricing but maybe you could add Hey we ll take that pricing but can you at least lock it in 00 17 32 Nick Simpson Like right now that seems like even just a big ask So that s kind of where at in this current market and hopefully we can get back to more of a stable time You know gas prices don t help and you name it There s always going to be pressures on it and hopefully we can see it all kind of smooth out here soon 00 17 50 Sam Wilson I love it No that s great Thanks for kind of explaining that for us Tell us about your value add deals that you have going on down in the Southeast right now What are some fun things that you are going forward to on those projects 00 18 01 Nick Simpson Yeah so we have a couple of deals going on in Atlanta specifically in like Decatur and our larger heavy value add deals and they have been going exceptionally The market is extremely strong We re seeing really quite a robust rent growth that we didn t quite expect We re seeing a lot of the people who have potentially I think a lot of the folks who have held these properties for a long time kind of feel like it s the time and that there s probably not a lot of runway left But when we look at the economics of these deals they re still under market from where they should be And there s still additional population growth coming And there s a value add that we can add to the property like washer and dryers in the units that are landscaping 00 18 44 Nick Simpson And I m not just talking like light landscaping I m talking like cut the trees away added some you know like amenities that are really nice like really nice playgrounds and grilling areas and stuff that really make it a home that can thrive up the rents And that s what we re seeing And that that s no different than any other market but we re really excited about what s going on down there Have a couple of deals that are in the pipeline Hopefully be closing network on track to close another one by the end of this quarter and pretty excited about just the continued rent growth of Atlanta like we are in many other places 00 19 16 Sam Wilson Right Nick That s absolutely fantastic Thank you for taking the time to really break down the two sides of your business They re unique and they are as different from each other as they could be I can really imagine the development side especially in the student housing all the way to value add there in Decatur Georgia That s loads of fun Appreciate you taking the time to break all that down for us today If our listeners want to get in touch with you or learn more about you and the projects you are involved in what is the best way to do that 00 19 40 Nick Simpson Certainly you can check us out on our website at mentiscapitalpartners com You can email me at nick mentiscp com I d be happy to jump on the phone or zoom call and touch base with whatever questions you might have Awesome 00 19 53 Sam Wilson And Nick can you spell your website there for us real quick 00 19 56 Nick Simpson Sure Mentis is M E N T I S And then you can do capital partners or you could just do cp com 00 20 03 Sam Wilson Awesome Nick thanks so much for your time but I do appreciate it 00 20 06 Sam Wilson Likewise have a good one Click here to visit this podcast episode