How to Assemble Large Projects & Deal With Development Problems

How to find and assemble large projects? What are the real estate market trends? Victor Menasce, an author, real estate developer, and host of the Real Estate Espresso Podcast, shares his knowledge.

Read this entire interview here: https://tinyurl.com/nut4m6b8

You have many projects right now, one in particular is huge. How did you get it? How did you put it together? And what are some of the good, bad and the ugly so far?

Every single one of our significant projects has landed in our lap. Somebody says, "I've got this deal. I don't know what to do with it. Can you help?" This was a huge property on the edge of Colorado Springs, it's 77 million square feet, and the perimeter is about seven miles.

Someone approached us who got it under contract, he didn't have the money to put it together, and had negotiated a reasonable price of 10,000 an acre, about 23 cents a square foot. If you look at agricultural land anywhere across the United States, it will vary between 3 to 10,000 an acre, depending on where it's located. If you're growing weed on it, it's maybe towards the higher end of that spectrum. I typically talk about the entitlement multiplier that comes with land because it's just dirt, why is this dirt worth more than that? It's because of what you can do with it. An agricultural land, 3 to 10,000 an acre, if it's entitled for development, and maybe you can put a subdivision on, it might be a couple of 100,000 an acre. If you can put a 40-story building on it might be several million an acre, but it's all still the same dirt. If we can transform this from agricultural land into the growth path for the city of Colorado Springs, we can probably create a reasonable multiplayer value.

We took over the contract, renegotiated it, and got it re-signed with us. We negotiated a fairly lengthy closing period, which included the entitlement. It had some timelines associated with it, so the sooner the entitlement or the expiration. We did not meet the entitlement timelines that we were originally expecting, based on conversations with both the county and the city of Colorado Springs, that this is something that would be pretty quick. It has turned out to not be quick, but it's still an amazing project.

Where is the market today? Are the deals better? Is it time to buy?

I would say that it's better in the sense that there's less insanity than there was because I think we would all acknowledge that many of the valuations that we witnessed in 2021, 2022, and parts of 2023 made no sense at all. I think reality is setting in for many of those and that's going to create distress for a number of them. If you think about folks who would have started a project, maybe a value-add project in 2021 with certain interest rate assumptions, assumptions about rent growth, etc, they find themselves in a very different world today, probably with no path to get into permanent financing without writing a massive check. And initially, they were probably thinking they were going to get a significant cash-out to refinance, but it's going the other way.

I think the lenders are still in a mode of "extend and pretend", bridge lenders in particular. The forecast flood of deals is a trickle, not a flood yet, I think it's coming but a lot of lenders don't want to recognize distress on their books. We are starting to see valuations become more reasonable. We are evaluating deals daily and looking at two projects that are significant opportunities for office-to-residential conversions at a decent price.

Victor Menasce

The Real Estate Espresso Podcast

victor@victorjm.com