May 28, 2022
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
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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.
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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.