Latest / The Land Development Podcast with Ryan Glick / What Lenders Look for in Land Deals with John Friedrich - TLP191

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What Lenders Look for in Land Deals with John Friedrich - TLP191 · The Land Development Podcast with Ryan Glick

• 0:00
  SPEAKER_01: Home builders have been kind of going on a bit of a buying spree to acquire those lots.
• 0:04
  SPEAKER_01: But in today's environment, the concessions that the public home builders are providing are beginning to eat into their margin.
• 0:11
  SPEAKER_01: That's trickling up and hitting their stock performance.
• 0:14
  SPEAKER_01: And that's arguably causing them to not stop, but slow down the cadence of their lot purchases.
• 0:21
  SPEAKER_01: If you're saying, okay, I could expect to sell five to ten homes per month last year, and that gets reduced down to two or three, now you're dealing with a five or six-year long project versus a three-year project.
• 0:33
  SPEAKER_01: You know, and that that breaks performers and breaks term sheets.
• 0:54
  SPEAKER_00: I am your host, Ryan Glick.
• 0:56
  SPEAKER_00: I'm excited today to have joining me John Friedrich.
• 0:59
  SPEAKER_00: John is the VP of business development at LFB Ventures.
• 1:03
  SPEAKER_00: John, thanks for joining me.
• 1:05
  SPEAKER_01: Thanks so much for having me.
• 1:06
  SPEAKER_01: Uh it's it's good to be here.
• 1:07
  SPEAKER_00: Yeah, no, absolutely.
• 1:09
  SPEAKER_00: Let's jump right in and let's get into some of your background and how you got into the industry.
• 1:13
  SPEAKER_00: So uh your path and how you ended up in uh in land development.
• 1:17
  SPEAKER_00: Can you share that with us?
• 1:18
  SPEAKER_01: Yeah, yeah, totally.
• 1:19
  SPEAKER_01: I started my career actually uh in the mining sector, uh working with my uh father uh mainly in South America, kind of uh gold mining exploration, kind of like larger land parcels kind of down there, which was you know a fantastic experience.
• 1:33
  SPEAKER_01: And then, you know, around 2010 or so, he he retired and um I chose to kind of transition into uh kind of my own path, which was uh real estate.
• 1:46
  SPEAKER_01: Um moved into doing uh small lot subdivisions, mainly in Los Angeles, a lot of townhomes, uh, some luxury spec stuff, mainly on the sponsor side, and you know, got to uh got a crash course in entitlements and permits uh in the uh in the lovely city of Los Angeles.
• 2:04
  SPEAKER_01: When I started, you could probably get something permitted in like maybe just under a year.
• 2:09
  SPEAKER_01: And by the time I left, it was probably closer to 24 months.
• 2:12
  SPEAKER_01: After that, fantastic experience.
• 2:15
  SPEAKER_01: Um, moved into the capital markets, uh mainly trading um RTLs and non-QMs in the secondary market uh with a great company up in uh Thousand Oaks called Rams.
• 2:25
  SPEAKER_01: And shortly after that, I moved into the lender side.
• 2:29
  SPEAKER_01: Uh, this is right 2022 when rates started to pop and stuff like that.
• 2:33
  SPEAKER_01: Became very challenging to make a make a spread in the markets uh at that particular time.
• 2:38
  SPEAKER_01: And then I was at a group called Ice Cap out of New York, uh, again, got a great group, and then decided I wanted to focus on some larger projects again and uh joined uh Blake and his team over here at LFB Ventures, where we focus uh exclusively on uh on uh on land and housing, transaction sizes between 10 and 100 million, um, with a lot of uh a lot of financing going towards developing lots for sale to the public home builders.
• 3:03
  SPEAKER_00: Well, nice.
• 3:04
  SPEAKER_00: I mean you you've kind of been uh all over the board there with uh some of your experience and everything, but having some of those initial experiences down in South America, did was that uh so your dad's background was it in some of that in the land side?
• 3:17
  SPEAKER_00: Like did he have have some experience on that side?
• 3:19
  SPEAKER_01: Yeah, so he uh he was kind of a classic uh like New Yorkian uh investment banker and mainly mergers and acquisitions.
• 3:26
  SPEAKER_01: So it takes about 20 years actually to develop a uh to develop a gold asset.
• 3:31
  SPEAKER_01: The first 10 years is just triangulating the the ore body beneath the ground.
• 3:35
  SPEAKER_01: Uh and then once you get it to a certain level of uh of certainty, then you sell that asset to a larger producer and they go and dig the big hole.
• 3:43
  SPEAKER_01: But what I recall about it is like, you know, understanding like the difference, the difference between patented and unpatented land.
• 3:49
  SPEAKER_01: So you have these you know huge uh assemblages that get put together over the course of like you know five years, where you know you have private land and then you have the government's land, and you have this kind of this checkerboard thing, and you're putting together these larger assemblages.
• 4:02
  SPEAKER_01: And then, you know, what was cool about it was you know, once the mine actually gets built, you get to see these like these cities or small towns kind of crop up.
• 4:11
  SPEAKER_01: I kind of really kind of infused in uh an appreciation for development in arguably its purest form of saying, like, okay, like you know, let's let's let's develop this, let's uh let's take all these various parcels, let's assemble them together, uh, let's put together kind of a master plan for uh what could be the highest and best use.
• 4:30
  SPEAKER_01: And while you know they may seem like they're fairly different, I think there's a lot of parallels between what master plan communities do uh and the public home builders, where you know, similar to mining, where there's an exploration company and then a production company, in land development, you have a land development company that's putting together the parcels, the infrastructure, and all that sort of thing, and then it's being sold to uh to a senior, a senior producer or a senior home builder over these longer sort of tracks of time.
• 4:54
  SPEAKER_01: And you you get to see this, this, this pretty cool arc of like, you know, how a community actually gets built and how that uh you know can ultimately make people's lives a bit better.
• 5:03
  SPEAKER_00: Yeah, well, you talked about LA, and funny enough, on the timing, you know, we had a couple weeks ago we had Niv Davidovich on the show who basically talked about all the problems with developing in Los Angeles.
• 5:15
  SPEAKER_00: I mean, he was talking about because he operates out of LA, and so he, as a lawyer related to a real estate lawyer, he was talking about just everything that's being dealt with out there.
• 5:23
  SPEAKER_00: So you got to deal with that firsthand and uh with some of your projects that you worked on out there.
• 5:28
  SPEAKER_00: And it sounds like that was that was quite the experience.
• 5:31
  SPEAKER_01: Yeah, well, you know, I think there's the evolution of the NIMBY movement, uh, and now the counterweight, the BIMBI movement that's just kind of started to crop up over the last kind of five years or so.
• 5:43
  SPEAKER_01: Los Angeles was kind of the OG, if you will, of that of that particular uh mindset.
• 5:49
  SPEAKER_01: And you know, I think you see, you know, you have things like Sequa, uh, which were, you know, the ideation or the uh origination of that is meant to be a positive thing, but it's effectively been weaponized now into uh a way to kind of curtail development.
• 6:05
  SPEAKER_01: And you know, I think once once you start kind of using these sorts of constructs to kind of stifle the flow of progress, it's not beneficial to the greater growth of the city.
• 6:17
  SPEAKER_01: And you know, you cross-compare what's going on in California with what's going on with in states like Texas, you you you can kind of clearly see, you know, people are voting with their feet, and you have this real kind of uh migration of both um people and companies to to a state that's not as it's not as that's just honestly not as difficult to work with, you know.
• 6:40
  SPEAKER_01: There's there's a lot to be said for what Texas is doing.
• 6:42
  SPEAKER_01: They're doing a lot of things right.
• 6:43
  SPEAKER_01: Um, you know, I think in terms of land development, it's still it's uh it's a you know it's a great place to do business.
• 6:48
  SPEAKER_00: Well, you know, with the people that listen into the show and everything, I think uh, you know, we talked before we press record just some of the things we want to get in here today, uh get into here today that will be, you know, a benefit to everybody listening in, some things that they probably deal with, or maybe some things they haven't dealt with yet, but they might run across it at some point in the future.
• 7:06
  SPEAKER_00: I think the first thing that I wanted to jump into here was talking about the stage at which or what could cause deals to get into trouble kind of in between the acquisition phase, then also actually going and delivering lots.
• 7:25
  SPEAKER_00: So you're coming at it from, I mean, although you have your background is in some development, but you're coming at it from a lender standpoint.
• 7:33
  SPEAKER_00: And so when you see, when you see some uh trouble in some of the deals that happen, you know, kind of between that acquisition and the actual development uh phase of a project and delivering those finished lots, what do you tend to see as some of the things that pop up that can, you know, cause a deal to go south?
• 7:50
  SPEAKER_01: Yeah.
• 7:50
  SPEAKER_01: Well, you know, it varies, it varies state from state, right?
• 7:54
  SPEAKER_01: You know, I think the the biggest thing is, you know, if like just to narrow the scope here, if we're talking about like just kind of classic acquisition and development financing, where where the loan is focused on acquiring the partial itself and then find then funding all of the horizontal improvements so those spots can be sold to a public home builder.
• 8:12
  SPEAKER_01: Typically, the like the first gate that that should likely be in hand is some level of a prelim plat map uh with the city.
• 8:18
  SPEAKER_01: And there and for there to there to be conversation flow going with the city.
• 8:22
  SPEAKER_01: The second sort of layer on on top of that is you know, how is it going to be subdivided?
• 8:29
  SPEAKER_01: What are the land use laws, you know, all of those types of things.
• 8:32
  SPEAKER_01: And you know, what we see, and this is more with kind of less experienced sponsors, is that you know, they think once the prelim plat map is is submitted, like, you know, they're not going to get a lot of red lines back.
• 8:43
  SPEAKER_01: And that's almost never the case, you know, like they're and again it it depends on the municipality and the state and like all those types of things, but having a good relationship with uh with the city, understanding the land use and uh getting a rhythm going with the red lines so you can get your final platform is a big component.
• 9:03
  SPEAKER_01: The second thing, uh the second layer is the will serve letters uh from the utilities.
• 9:09
  SPEAKER_01: Raw land development by nature happens, you know, largely on the outskirts of a city, unless you're kind of finding the donut hole, uh, for lack of a better term, you know, in terms of like the last parcel that is kind of surrounded.
• 9:20
  SPEAKER_01: And you know, as you get farther and farther out from the uh urban core, the utilities you know need to have the ability to actually serve that land.
• 9:27
  SPEAKER_01: And what is the actual infrastructure cost going to be to have various waste stations for sewer, electrical, water, and uh and where those facilities are actually going to sit?
• 9:38
  SPEAKER_01: Are they gonna sit on the city's land or a neighboring parcel and you're and you're gonna plug into those utilities, or is it gonna be on your parcel?
• 9:46
  SPEAKER_01: Like is it gonna be on-site or off-site?
• 9:48
  SPEAKER_01: Uh, and then what is the funding mechanism for for that?
• 9:52
  SPEAKER_01: One of the largest things that we see break proformos is the backbone expenditure because like you have to fund all of those costs at the beginning of the project.
• 10:04
  SPEAKER_01: And if those costs are so heavy that it takes you know longer to pay those off and you're and you're only making profit on the like the last 10% of your lots or things like that, it becomes very difficult for a lender to justify that in investment because it takes so long to pay off those infrastructure costs.
• 10:24
  SPEAKER_01: You know, I think so.
• 10:25
  SPEAKER_01: One is you know, making sure that there's a good volley going back and forth with with with the city.
• 10:29
  SPEAKER_01: Flat maps are kind of in are the are the first thing.
• 10:33
  SPEAKER_01: And you know, for the less experienced sponsors, some sometimes the thing that gets kind of screwed up.
• 10:38
  SPEAKER_01: The second item is the will serves and the infrastructure costs.
• 10:43
  SPEAKER_01: And then, you know, the the third, and you know, this can be kind of obvious, is the lot purchase agreements.
• 10:48
  SPEAKER_01: I think you know, that's certainly something with the current environment that is kind of getting more into play.
• 10:54
  SPEAKER_01: Like if we flash back to 2020, right?
• 10:57
  SPEAKER_01: Easy monetary policy, and we go in into 2022, rates in increase, all existing inventory effectively gets locked in place.
• 11:06
  SPEAKER_01: Your listeners probably know this story very, very well.
• 11:09
  SPEAKER_01: You know, for the last you know, four some odd years, home builders have been kind of going on a bit of a buying spree to acquire those lots.
• 11:17
  SPEAKER_01: But in today's environment, you know, the concessions that LDC home builders are are providing are beginning to eat into their margin.
• 11:25
  SPEAKER_01: That's trickling up and hitting their stock performance, and that's arguably causing them to not stop, but slow down the cadence of their lot purchases.
• 11:35
  SPEAKER_01: And if you're if you're saying, okay, I could expect to sell five to ten homes per month last year and that gets reduced down to two or three, now you're dealing with a five or six-year-long project versus a three-year project, you know, and that that breaks performers and breaks term sheets.
• 11:51
  SPEAKER_01: Uh so I think those those are the three kind of main things that would uh largely impact a developer, and those are all things that you know we're happy to assist with, you know, in terms of what uh what we do.
• 12:03
  SPEAKER_00: Okay.
• 12:03
  SPEAKER_00: Well, no, that's good.
• 12:04
  SPEAKER_00: And I I jotted down a couple things.
• 12:05
  SPEAKER_00: And the last thing you just said there was one of the questions, because if a developer is thinking about using a lender for part of their project versus just maybe they're doing a smaller project and it turns into just friends and family, and that's basically all they do for their capital stack.
• 12:22
  SPEAKER_00: But if they're gonna, if they're gonna do a little bit larger project where they do need some financing on the actual project, one of the things I was wondering, and I kind of jotted down here, is you know, should a developer expect that as they come to the table and have conversations with different lenders to try to find the right partner on a project from a lending standpoint, that they should have all of these pieces figured out and a part of their presentation versus coming in and having some of these big question marks in there for the project?
• 12:51
  SPEAKER_00: Or if you're doing more of the acquisition and development lending, maybe they don't have all these pieces completely figured out yet because the you know acquisition side of it might potentially happen before some of these other things are figured out.
• 13:05
  SPEAKER_00: So I'm just trying to figure out at what how far should a developer be before they approach an actual lender.
• 13:12
  SPEAKER_01: Yeah, yeah, totally.
• 13:14
  SPEAKER_01: And I think the uh part of what makes this this game a bit fun is trying to figure out the sequencing and all and all the various pieces of the puzzle, right?
• 13:22
  SPEAKER_01: You can typically reduce the basis of what your acquisition is, depending on how raw that that parcel actually is in regards to the work that is being done.
• 13:33
  SPEAKER_01: I think you know the big difference in leverage, uh, at least for lenders, is there's like if it's pre-sold to uh like a well-known private uh or a public developer, you you can push the leverage up to like you know 85% loan to cost in terms of the total project cost, right?
• 13:52
  SPEAKER_01: If you have LPAs in hand from a public or a well-known regional um home builder, and those LPAs can uh can provide deposits, you know, five, 10%, 10% of what the acquisition cost is on the actual uh on the actual parcel.
• 14:08
  SPEAKER_01: So like that means that the developer can you know only have to come up with 5% of the total cap stack, and their equity multiple can be quite attractive.
• 14:18
  SPEAKER_01: To get that sort of cap stack, you you definitely need your prelimin, you know, some sort of conversation going on with with the with the city.
• 14:27
  SPEAKER_01: Uh you need to at least have had conversations with the utility providers and getting some level of a will serve.
• 14:33
  SPEAKER_01: Uh, if you're in a place like Texas, you know, the municipal utility district MUDs, like those, those bond programs, you know, you can talk to bond providers or talk to groups like like ours uh about getting the utilities um properly funded because that's an additional revenue stream to the project.
• 14:52
  SPEAKER_01: And yeah, to get that higher uh leverage, you don't necessarily need a executed document, but you need a draft LOI from a home builder.
• 15:02
  SPEAKER_01: And you need to have at least had the conversation and have gotten the draft from the public uh home builder.
• 15:08
  SPEAKER_01: And then, you know, as you get your financing, then you go back to them and you say, Hey, I've gone, I've gotten my financing, here's the term sheet, we're ready to execute this uh this LOI.
• 15:20
  SPEAKER_01: And then, you know, you're moving from that to your purchase agreement, and then ultimately until closing.
• 15:25
  SPEAKER_01: Now, if you want to just do it yourself, there are there are facilities out there, but they're lower leverage.
• 15:31
  SPEAKER_01: You know, you're talking probably 60 to 70 percent uh loan, loan to cost, of that true 85% that you're getting with those more um those more creative uh facilities.
• 15:40
  SPEAKER_01: But the rates are also reflective of that as well, because they're like effectively what the lender is banking on at that point is the is the actual developer being able to uh either buy the lots from themselves or selling them one by one, and that's a higher risk uh sort of and endeavor, so they tend to uh cut the leverage in order to handle for that.
• 16:00
  SPEAKER_00: Yeah, and I'm kind of follow as I'm following along, kind of the sequencing of everything and thinking about you know getting to the point where a deal is struck with a developer, the developer then goes and actually turns dirt and starts to do the project, and then they get to a certain point in the project where they realize the project is costing more than what they expected.
• 16:21
  SPEAKER_00: Now, is I would expect and I guess it my question would be is would a developer tend to raise money with the expectation that a certain percentage, you know, having a certain percentage of overhead to cover things that come up, or is that just a conversation that comes up with the lender when they see that this is starting to happen, to maybe go and actually get some additional funds to help cover what that expected overage is going to be?
• 16:51
  SPEAKER_01: There's there's a couple pieces to that.
• 16:53
  SPEAKER_01: So one is like if we're talking about a development loan that's being sold to a public home builder, right?
• 17:00
  SPEAKER_01: Like your takeout schedule is effectively set at that point.
• 17:04
  SPEAKER_01: So in terms of in terms of time, timing and deliverables and how that ripples out into your actual construction costs, like that's that's set.
• 17:13
  SPEAKER_01: And it's uh, and if it's by a big public home builder, like you know, like you're you're now contracted with that group, they have their escalators in in place, they have their cadence, they they are going to buy that lots, those lots within a uh on a particular cadence.
• 17:27
  SPEAKER_01: In regards to your costs, you know, they'll typically the lender will ask, are you self-performing or are you hiring a GC?
• 17:36
  SPEAKER_01: If you're hiring a GC, like then you are moving that risk to the GC at some level of a Gmax in regards to the actual contract itself.
• 17:46
  SPEAKER_01: And like, and then you have bonding programs and all that sort of thing.
• 17:49
  SPEAKER_01: What's become like very prevalent in uh in kind of the throes of due diligence are engineering OPCs or um opinions of project cost, and those are effectively like in line with the hard bids to the subcontractors.
• 18:05
  SPEAKER_01: So effectively, like the program is largely set upon funding of the project.
• 18:11
  SPEAKER_01: And that's why the LPAs are important because they know that there's gonna be a buyer at a particular point.
• 18:18
  SPEAKER_01: And as long as they get the CapEx out the door and the project built, there's gonna be a buyer for it.
• 18:23
  SPEAKER_01: That's why they're willing to kind of push the leverage on it.
• 18:26
  SPEAKER_01: Now, if there isn't a LPA or it's a smaller, it's a smaller developer, yes, there's always contingency.
• 18:33
  SPEAKER_01: And you know, then they're they're largely looking at like, well, are they selling to themselves?
• 18:37
  SPEAKER_01: And if they are, then you know, what's the construction uh takeout environment?
• 18:42
  SPEAKER_01: There's the good news is that these days there's you know, kind of there's a lot of different types of vertical financing providers.
• 18:48
  SPEAKER_01: Pretty much every big asset manager from Apollo to Olympus, kind of name name name name your Greek God of financiers, they all have some sort of um vertical program.
• 19:03
  SPEAKER_01: So at that point, they're really kind of underwriting to like what is the absorption of the actual homes themselves versus the uh versus the lot takedowns.
• 19:10
  SPEAKER_01: And that becomes just kind of a general kind of CMA sort of sort of study of like what are homes selling for, you know, how long are they sitting on the market, and then like you're you're determining your absorption rates mainly based on those metrics.
• 19:23
  SPEAKER_00: I think earlier you said something about things being things can potentially be vastly different from market to market, right?
• 19:30
  SPEAKER_00: You're talking about California versus uh in Texas.
• 19:33
  SPEAKER_00: What are some of those uh what are some of the things that can be different from market A to market B that might make a deal pencil over here, but not over here?
• 19:43
  SPEAKER_01: There are primary markets, like you know, your your Los Angeles's, your Dallas's, your your Miami's, your New York's, your Chicago's, right?
• 19:51
  SPEAKER_01: You know, those types of markets are typically easier to underwrite just because there's so much kind of throughput, right?
• 19:59
  SPEAKER_01: Uh you're dealing with larger populations, you're dealing with like fully diversified economies, and you know, those markets are easier to underwrite.
• 20:09
  SPEAKER_01: The issue is that land values are typically higher, so your margins get compressed, right?
• 20:13
  SPEAKER_01: So that means you typically need some sort of lay of some sort of level of scale or you know, larger dollar amounts in order to kind of play in those markets.
• 20:21
  SPEAKER_01: I and like I when I'm talking about Dallas, I'm talking about like Dallas proper, not like fully out in the fully out in the sticks.
• 20:28
  SPEAKER_01: So, you know, I think that's one sort of item.
• 20:31
  SPEAKER_01: When you're dealing with kind of smaller or secondary markets, you know, I think there's there's arguably a lot more margin and opportunity there.
• 20:39
  SPEAKER_01: I think what's what's interesting about those those plays is that, you know, like you can get in at a lower basis, but there's more volatility.
• 20:47
  SPEAKER_01: I would actually argue that those markets are probably the most exciting in the US right now.
• 20:52
  SPEAKER_01: Like, you know, you take like what's going on in Indianapolis or Columbus or Kansas City.
• 20:57
  SPEAKER_01: These are markets that have been largely overlooked, overlooked for the last like you know, 10, 15 years.
• 21:03
  SPEAKER_01: And you know, as as the cost of living has gotten so so high in kind of coastal cities and things like that, you've seen kind of this net migration into these markets uh and has really kind of pushed for kind of further um further development.
• 21:17
  SPEAKER_01: Anything else you want you want me to kind of dial in there?
• 21:20
  SPEAKER_00: I can I can I think that's good there.
• 21:22
  SPEAKER_00: And you know, I'm also thinking about things, and maybe this is more from your due diligence and analysis of a particular market.
• 21:31
  SPEAKER_00: When a developer is going to a market and you're wondering, you know, how feasible is this project to be successful in that particular market.
• 21:39
  SPEAKER_00: Maybe there's certain things around, you know, what are what are average rents in that area, or what are what are some other you know, prices or comps, or something that might be going on in that area that you might look at.
• 21:50
  SPEAKER_00: I'm just wondering if there's certain things developers, when they're considering going into a market to do a project, if there's things that they should be thinking about as a part of their due diligence process, not necessarily.
• 22:00
  SPEAKER_00: necessarily due diligence as in, you know, there's a specific piece of land, but more so uh more macro of saying, like, should I even go into this, into this particular um area?
• 22:09
  SPEAKER_01: Yeah, yeah.
• 22:10
  SPEAKER_01: Well that's the uh that's that's where you you're you're kind of talking about a leading and confirming indicators.
• 22:15
  SPEAKER_01: You know, I think what's interesting about that is, you know, once rents are kind of moving or once prices are moving, you're you're arguably probably a bit late.
• 22:25
  SPEAKER_01: You want to get in, you know, effectively before that movement happens, where else you're acquiring at that new basis.
• 22:31
  SPEAKER_01: And the margin is typically made you know before the market moves or as the market is beginning to is is beginning to move.
• 22:37
  SPEAKER_01: And I think that's that's probably the most exciting part of the game right there is trying to find figure out that puzzle.
• 22:42
  SPEAKER_01: I tend to uh or try to understand what is the total factor productivity of a municipality.
• 22:49
  SPEAKER_01: How is it adding value per hour worked uh from the workforce?
• 22:54
  SPEAKER_01: And you know I think there's a lot of different layers to what drives that.
• 22:59
  SPEAKER_01: There was a I'm gonna screw up these names, but uh there was a white paper that got put out by a duo out of Stanford called Heich Maretti, uh I think uh from about 2022 or something like that.
• 23:12
  SPEAKER_01: And they were looking at the relationship between productivity and housing.
• 23:17
  SPEAKER_01: Typically you think like okay there's a new employment center that gets dropped some somewhere 500 jobs are coming to Columbus, right?
• 23:25
  SPEAKER_01: And like that that is going to drive the housing market because there's a lot of people going to uh to work at that particular job site right well it turns out it's it's a little bit more complicated than that.
• 23:36
  SPEAKER_01: There's kind of like a feedback loop where the cost of housing actually affects the cost of labor and the cost of labor affects the productivity of the city.
• 23:48
  SPEAKER_01: So like you know you take someplace like you know San Francisco, right?
• 23:52
  SPEAKER_01: Like silly high cost of living and but like there's a lot of value that gets created there.
• 23:58
  SPEAKER_01: Well the cost of the housing and the housing policy is actually contributing to the actual cost of labor in San Francisco because uh because it's got such a restrictive housing market.
• 24:10
  SPEAKER_01: You know so San Francisco could arguably be even more productive if they if they had more lenient housing policy.
• 24:17
  SPEAKER_01: And you and you cross compare that with the with with with the Southeast like you look at like what's happening in the Carolinas or Tennessee or like all of those types of things where you know you've seen the emergence of the Carolina triangle, the the technology triangle and whatnot, that's mainly driven by you know cost of living and uh and land use by making it you know super affordable to develop there.
• 24:40
  SPEAKER_01: And you have people that are able to come in afford to live that lowers the cost of that labor and then you have companies almost follow that because it's now so cheap to set up there.
• 24:51
  SPEAKER_01: So in terms of like analyzing a market in terms of what that next big swing is, I think it's something along those lines of like yes absolutely like you know you should be focused on areas that are uh friendly to employment uh and be tracking you know when there's new campuses being set up and all of those types of things but it needs to be done in parallel with like what is the land use policy of that municipality and will they actually allow for housing to be built there at scale and create a conducive environment for you know both housing and business to to be set up.
• 25:27
  SPEAKER_00: Well I think uh at this point um I'd like to shift into the last segment which is the lightning round so I've got five questions for you here.
• 25:34
  SPEAKER_00: Um and there tends to be when I do this a little bit of overlap just because of you know we talk about some things I didn't necessarily know we were going to talk about and so on.
• 25:42
  SPEAKER_00: But either way, let's go ahead and get into this.
• 25:45
  SPEAKER_01: First question for you what's the first thing you look at when someone sends you a deal look at when somebody sends me a deal typically the market is it in a city that that I think is kind of prone for growth and is it in a part of town that makes sense right is it way out in the sticks or like is it like oh okay that's like that's a natural extension of like that of that particular street or like I could see how that master plan community can clip on to like those neighboring parcels.
• 26:12
  SPEAKER_01: And then kind of almost at the same time is you know running a running a Google search on the sponsor uh just to see you know if they've done this sort of sort of thing before if there are any red flags and then once it kind of if the location makes sense and the sponsor's done a couple things before it's typically worth some time time to dig in and stuff like performas and all that sort of thing can be worked out.
• 26:35
  SPEAKER_01: Is it being done by you know good people who have done it before and is it in a market that makes sense?
• 26:40
  SPEAKER_01: Those are the two big things.
• 26:41
  SPEAKER_00: All right second one what's the most dangerous assumption a developer can make in an underwriting model?
• 26:48
  SPEAKER_01: Probably see the cost of materials being too low or their takeout pricing being being too high.
• 26:54
  SPEAKER_00: Alright third one what's one thing that immediately makes you skeptical of a deal and this might overlap a little bit with the first one.
• 27:01
  SPEAKER_01: Yeah if someone is reluctant to share the address that's typically a big thing like we're not sharing like nuclear launch codes here.
• 27:09
  SPEAKER_01: It's a piece of dirt you know and if they and if they're hesitant um a about it it typically means that they don't control it or they're just trying to fish for information.
• 27:18
  SPEAKER_00: All right fourth one what makes a developer good to work with from a capital perspective?
• 27:23
  SPEAKER_01: Intellectual honesty this work is challenging and like you know you've got a thousand different things that that that can and will go wrong.
• 27:30
  SPEAKER_01: You know if the math is not coming together like let's just have an honest conversation about it.
• 27:35
  SPEAKER_01: And then once we've once once we know what the problem is we can work towards a solution opposed to just having a a layer or a buffer that gets in the that that gets in the way just be direct and honest and there's typically a a solution somewhere.
• 27:48
  SPEAKER_00: All right last one what's one mistake you see developers make when raising capital?
• 27:53
  SPEAKER_01: Trying to do too many projects at once just focus on the one that that is the closest to being ready and you know capital providers love repeat business.
• 28:04
  SPEAKER_01: So you know do do one do it right and then you know the follow-ons will happen you know if you have a good experience with a lender and a successful project they'll throw money at you on the next one.
• 28:16
  SPEAKER_01: You know it's like they want to set up uh programmatic relationships.
• 28:20
  SPEAKER_01: All right well that brings us to an end here what's the best way for people listening in to connect with you and also learn more about your company yeah our company is LFB Ventures that's Larry Frank Blake Ventures LFBventures.com uh is the best way uh you can shoot me an email it's just Johnjohn at lfbventures.com I'm sure we'll have you know links to stuff in the description happy to chat um if it's just to throw a throw out ideas, you know super low pressure.
• 28:47
  SPEAKER_00: Awesome.
• 28:47
  SPEAKER_00: And yes you're exactly right so if you guys look down in the description for this episode there will be a link to the show notes page and on the show notes page is where you're gonna find a link there to the LFB Ventures website and also to John's email address.
• 28:59
  SPEAKER_00: John thanks again for hopping on here and sharing some of your experience in the industry and uh digging into some of these topics related to the lending space really appreciate it.
• 29:08
  SPEAKER_00: Yeah of course thanks so much for uh for having me it was a lot of fun all right guys that's all for this episode if you're not already subscribed please click that button we'd love to have you back for the next one otherwise we will talk to you all next week