Speaker 1Home builders have been kind of going on a bit of a buying spree to acquire those lots. But in today's environment, the concessions that the public home builders are providing are beginning to eat into their margin. 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. If you're saying, okay, I could expect to sell five to 10 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, and that breaks performance and breaks term sheets.
Speaker 2Hey, what's going on, everybody? Welcome back to the Land Development Podcast. I am your host, Ryan Glick. I'm excited today to have joining me John Friedrich. John is the VP of Business Development at LFB Ventures. John, thanks for joining me.
Speaker 1Thanks so much for having me. It's great to be here.
Speaker 2Yeah, no, absolutely. Let's jump right in. Let's get into some of your background and how you got into the industry. So your path and how you ended up in land development. Can you share that with us?
Speaker 1Yeah, yeah, totally. I started my career actually in the mining sector, working with my father in the Inns Health. He was a gold miner in America, gold mining exploration, larger land parcels down there, which was a fantastic experience. Then around 2010 or so, he retired and I chose to transition into my own path, which was real estate. I moved into doing small lot subdivisions, mainly in Los Angeles, a lot of townhomes, some luxury spec stuff, mainly on the sponsor side. Got a crash course in entitlements and permits in the lovely city of Los Angeles. When I started, you could probably get something permitted in maybe just under a year, and by the time I left, it was probably closer to 24 months. After that fantastic experience, moved into the capital markets, mainly trading RTLs and non-QMs in the secondary market with a great company up in Thousand Oaks called Rams. Shortly after that, I moved into the lender side. This was right in 2022 when rates started to pop and stuff like that. It became very challenging to make a spread in the markets at that particular time. And then I was at a group called IceCap out of New York, again, a great group. And then decided I wanted to focus on some larger projects again, and joined Blake and his team over here at LFB Ventures, where we focus exclusively on landed housing, transaction sizes between 10 and 100 million, with a lot of financing going towards developing lots for sale to the public home builders.
Speaker 2Well, nice. I mean, you've kind of been all over the board there with some of your experience and everything, but having some of those initial experiences down in South America, was that, so your dad's background, was it in some of that, in the land side? Like, did he have some experience on that side?
Speaker 1Yeah. So he was kind of a classic dad, like New York investment banker, and mainly mergers in. And acquisition. So I think it's about 20 years, actually, to develop a gold asset. The first 10 years is just triangulating the ore body beneath the ground, and then once you get it to a certain level of certainty, then you sell that asset to a larger producer and they go and dig the big hole. But what I recall about it is understanding the difference between patented and unpatented land. So you have these huge assemblages that get put together over the course of like 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. 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. It kind of really kind of infused an appreciation for development in arguably its purest form of saying like, okay, like, you know, let's develop this, let's take all these various parcels, let's assemble them together. And let's put together kind of a master plan for what could be the highest and best use. 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 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 a senior producer or a senior home builder over these longer sort of tracks of time. 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, you know, can ultimately make people's lives a bit better.
Speaker 2Yeah. 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. I mean, he was talking about, cause 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. So you got to deal with that firsthand. And, uh, with some of your projects that you worked on out there and it sounds like that was, that was quite the experience.
Speaker 1Yeah. Well, you know, I think there's the evolution of the NIMBY movement, uh, and now the counterweight, the BNB movement, that's just kind of started to crop up over the last kind of five years or so. Los Angeles was kind of, uh, was the OG, if you will, of that, of that particular, uh, mindset. And, you know, I think you see, you know, you have things like CEQA, uh, which were, you know, the ideation or the origination of that is meant to be a positive thing, but it's effectively been weaponized now into a way to kind of curtail development. 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. And, you know, you cross compare, you know, 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, there's, there's a lot to be said for what Texas is doing. They're doing a lot of things, right. Um, you know, I think in terms of land development, it's still, it's a, it's a, you know, it's a great place to do business.
Speaker 2Well, 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. 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. So you're coming at it from, I mean, although your, your background is in some development, but you're coming at it from a lender standpoint. 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?
Speaker 1Yeah. Well, you know, it varies, it varies state from, from state, right. You know, I think though 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 funding all of the horizontal improvements. So those slots can be sold to a public home builder. Typically the, like the first gate that, that should likely be in hand is some level of a prelim plat map with the city and there, and for there to be conversation flow going with the city. The second sort of layer. On, on top of that is, you know, how is it going to be so divided, what are the land use laws, you know, all of those types of things and you know, what we see, and this was 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 and that's almost never the case, you know, like they're in, again, it, it depends on the, 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, a, a rhythm going with the red lines so you can get your, uh, your final plat map is a big component. The second thing, uh, the second layer is the well serve letters, uh, from the utilities. 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 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. And what is the actual infrastructure cost going to be to, you know, have the various way stations for sewer, electrical, water, and, uh, and where those facilities are actually going to sit. Are they going to sit on the city's land or a neighboring parcel and you're, and you're going to plug into those utilities or is it going to be on your parcel, like is it going to be onsite or offsite, uh, and then what is the funding mechanism for, for that? Yeah. One of the first things that we see break pro formos is the backbone expenditure because like you have to find. all of those costs at the beginning of the project. And if those costs are so heavy that it takes longer to pay those off and you're only making profit on 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. You know, I think, so one is making sure that there's a good volley going back and forth with the city. Flat maps are kind of the first thing. And, you know, for the less experienced sponsors, sometimes the thing that gets kind of screwed up. The second item is the will serves and the infrastructure costs. And then, you know, the third, and, you know, this can be kind of obvious, is the lot purchase agreements. I think, you know, that's certainly something with the current environment that is kind of getting more into play. Like if we flash back to 2020, right? Easy monetization. Territory policy. And we go into 2022, rates increase. All existing inventory effectively gets locked in place. Your listeners probably know this story very, very well. 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. But in today's environment, you know, the concessions that public home builders are providing are beginning to eat into their margin. 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. And if you're saying, okay, I could expect to sell five to 10 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 breaks performance and breaks term sheets. So I think those are the three kind of main things that would largely impact a, the developer and those are all things that, you know, we're happy to assist with, you know, in terms of what, what we do.
Speaker 2Okay, well, no, that's good. And I jotted down a couple of things. 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. But if they're going to, if they're going to do a little bit larger project where they do need some, 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. 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. So I'm just trying to figure out at what, how far should a developer be before they approach an actual lender?
Speaker 1Yeah, yeah, totally. And I think the part of what makes this game a bit fun is trying to figure out, you know, the sequencing and all, and all the various pieces of the puzzle, right? You can typically, you know, reduce the basis of what your acquisition is depending on how raw that parcel actually is in regards to the work that is being done. I think, you know, the big difference in leverage, at least for lenders, is there's like, if it's pre-sold to like a well-known private or a public developer, you can push the leverage up to like, you know, 85% loan to cost in terms of the total project cost, right? If you have LPAs in hand from a public or a well-known regional, home builder. And those LPAs can, I can provide deposits, you know, 5, 10, 10% of what the acquisition cost is on the actual, on the actual parcel. So 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. To get that sort of cap stack, you definitely need your prelim plat, you know, some sort of conversation going on with the city. You need to at least have had conversations with the utility providers and getting some level of a will serve. 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 about getting the utilities properly funded because that's an additional revenue stream to the project. And yeah, to, to get that higher leverage, you don't necessarily need a, you don't necessarily need to execute a document, but you need a draft LOI from a home builder. And you need to at least have the conversation and have gotten the, the draft from the public home builder. 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, this LOI. And then, you know, you're moving from that to your purchase agreement, and then ultimately until closing. Now, if you don't want to just do it yourself, there are, there are facilities out there, but they're lower leverage. You know, you're talking about the 60 to 70% loan, loan to cost of that true 85% that you're getting with those more, those more creative facilities. But the rates are also really 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 either buy the lots from themself or selling them one by one. And that's a higher risk sort of, and, and ever. So they tend to cut the leverage in order to handle for that. -
Speaker 2Yeah. And I'm kind of, 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. Now, as I would expect, and I guess 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? -
Speaker 1There's, there's a couple of pieces to that. So one is like, if we're talking about, a development loan that's being sold to a public home builder, right? Like your takeout schedule is effectively set at that point. 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. And it's, 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 place, they have their cadence. They, they are going to buy that lots, those lots within a, on a particular cadence. In regards to your costs, you know, they'll, typically the, the, the lender will ask, are you self-performing or are you hiring a GC? If you're hiring a GC, like then you are moving that risk to the GC at some level of a G max in regards to the actual contract itself. And like, and then you have bonding programs and all that sort of thing. What's become like very prevalent in, in kind of the throes of due diligence are engineering, mobile PCs, or opinions of project costs. And those are effectively like in line with the, with the hard bids to the subcontractors. So effectively like the program is largely set upon funding of the project. And that's why the LPAs are important because they know that there's going to be a buyer at a particular point. And as long as they get the capex out the door and the project built, there's going to be a buyer for it. That's why they're willing to kind of push the, the leverage on it. Now, if there isn't a LPA or it's a smaller, it's a smaller developer, yes, there's always contingency. And you know, then they're, they're largely looking at like, well, are they selling to themselves? And if they are, then, you know, what's the construction takeout environment. 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. Pretty much every big asset manager from Apollo to Olympus kind of name, name, name, name your Greek, God of, of financiers, they all have some sort of vertical program. So at that point, they're really kind of underriot to like, what is the absorption of the actual homes themselves versus the, versus the lot takedowns. 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.
Speaker 2I think earlier you said something about, things being, things can potentially be vastly different from market to market, right? You're talking about California versus in Texas. What are some of those, 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?
Speaker 1There 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? You know, those types of markets are typically, typically easier to underwrite just because there's so much kind of throughput, right? with larger populations you're dealing with like fully diversified economies and you know those markets are easier to underwrite the issue is is that land values are typically higher so your margins get compressed right 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 and like when i'm talking about dallas i'm talking about like dallas proper not like fully out in the fully out in the sticks so you know i think that's one sort of item 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 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 i would actually argue that those markets are probably the most exciting in the u.s right now like you know you take like what's going on in indianapolis or columbus you know you take like what's going on in indianapolis or columbus or columbus or columbus or kansas city these are markets that have been largely overlooked overlooked from the last like you know 10 15 years 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 it's really kind of pushed for kind of further further development anything else you want you want me to dial in there i can i can
Speaker 2i think that's good there and you know i'm also thinking about things and maybe this is more from your due diligence and analysis of a particular market 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 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 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 you know thinking about as a part of their due diligence process not 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 area
Speaker 1yeah yeah well that's the uh that's that's where you're kind of talking about a leading and confirming indicators 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 you want to get in you know effectively before that movement happens whilst you're acquiring at that new basis and the margin is typically made you know before the market moves or as the market is beginning to is beginning to move and i think that's that's probably the most exciting part of the game right there trying to find figure out that puzzle i tend to or try to understand what is the total factor productivity of a municipality how is it adding value per hour worked uh from the workforce and you know i think there's a lot of value in that and i think that's a lot of value in that there's a lot of different layers to what drives that 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 meretti uh i think uh from about 2022 or something like that and they were looking at the relationship between productivity and housing typically you think like okay there's a new employment center that gets dropped some somewhere 500 jobs are coming to columbus right and like that's going to drive the housing market because there's a lot of people going to to work at that particular job site right well it turns out it's a little bit more complicated than that 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 so like you know you take some place like you know san francisco right like silly high cost of living and but like there's a lot of value that gets created there well the cost of the housing and the housing policy is actually contributing to the actual cost of labor in san francisco because because it's got such a restrictive housing market you know so san francisco could arguably be even more productive if they if they had more lenient housing policy and you and you cross compare that with the 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 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 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 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 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 land use policy so i think it's something that's really important to look at and i think this is to to be set up well i think
Speaker 2uh at this point um i'd like to shift into the last segment which is lightning around so i've got five questions for you here 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 but either way let's go ahead and get into this first question for you what's the first thing you look at when someone sends
Speaker 1you a deal so okay 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 and then kind of almost at the same time is you know printing a running a google search on the sponsor uh just to see you know if they've done this sort of thing before there are any red flags and then once it kind of if the market is in a particular location makes sense and the sponsor has done a couple things before it's typically worth some time time to dig in and stuff like performance and all that sort of thing can be worked out is it being done by you know good people have done it before and is it in a market that makes sense those are the two big
Speaker 2things all right second one what's the most dangerous assumption a developer can make in an underwriting
Speaker 1model probably see the cost of materials being too low or if they're takeout pricing being being too high all right third one
Speaker 2what's one thing that immediately makes you skeptical of a deal and this might overlap a little bit with the
Speaker 1first one 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 it's a piece of dirt you know and if they and if they're hesitant um a about it typically means that they don't control it or they're just trying to fish for information all
Speaker 2right fourth one what makes a developer good to work with from a capital perspective
Speaker 1intellectual honesty this work is challenging and like you know you've got a thousand different things that that that can and will go wrong you know if the math is not coming together like let's just have an honest conversation about it 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 that that gets in the way just just be direct and honest and there's typically a a solution
Speaker 2somewhere all right last one what's one mistake you see developers make when raising capital
Speaker 1trying to do too many projects at a just focus on the one that that is the closest to being ready and you know capital providers love repeat business 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 you know it's like they want to set up uh programmatic relationships all right
Speaker 2well 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
Speaker 1company yeah our company is lfb ventures that's larry frank blake ventures at love be ventures.com uh is the best way uh you can shoot me an email it's just john j-o-h-n at lfb ventures.com i'm sure we'll have you know links and stuff in the description happy to chat um if it's just to throw throw out ideas you know super low pressure awesome
Speaker 2and 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 going to find a link there to the lfb ventures website and also to john's email address uh 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
Speaker 1it yeah of course thanks so much for having me it was a lot of fun all
Speaker 2right 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 you you
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