¶ Managing Construction Projects and Overcoming Challenges
Welcome back everybody to another episode of Big Talk About Small Business . I'm here with my partner in crime , Eric Howerton . What's up , Mark ?
Everything's up . Man , You've been dealing with some stuff , haven't you ?
I don't deal with half the stuff that you deal with . These things , no dude .
I really didn't . No , there's no way . There's no way . I'm the first person I've ever met in my life .
Well then , I'm busy with a lot of small stuff that doesn't make the kind of money your stuff does . I think that's the .
I'm just spending money man , I'm just spending money in town .
I spend so much money . I closed on this house that Sonia and I are going to move into in like eight weeks . Close on on Wednesday , thursday , I had about 15 guys working . I added it up . We've already spent $58,000 in a week . Okay , I mean , I think that's a lot , don't you know ? That's a lot of money .
I mean a lot done though , have you , yeah , so I want to talk about that , because I think that what I actually was thinking about this just yesterday , when you said that before that , the very next day , you had all your subcontractors out at the property in one fell swoop . One day yes , I did . How do you get everybody there at the same time ?
Well , you know , I used to be in that business . Yeah , it certainly helps .
So you already have people in the role of that . You know who to call for a certain thing .
Yeah , although some of our providers have changed since we got out of it . We're just doing our own projects , but basically that's what it is , and you know , my experience as a contractor is that if you give people work steadily , yeah , you just keep them busy on one job from one job to the next .
If you don't make them hard dollar bid and if you pay the bill , what do you mean hard dollar bid ? Hard dollar bid means , like , I want you to do A , b and C . What's that going to cost me ? Okay , instead of just letting them go to work and then give you a bill . Oh , that's the goal that way .
That's the way I generally work . Wouldn't that put you in a situation where you're like I mean , they might overcharge you , or ?
It could , but then you never work with them again . Ah , yeah , okay . The secret is they all hate bidding . Okay , and they're . Either they're going to overbid it because they're all super busy Sure , the only way to protect themselves is to overbid it . I mean renovations . You never know what you're going to encounter .
Things change Every time my wife walks in or I walk in and change something . You know what I mean , because there's stuff along the way and so I never make them hard dollar bid . I give them work constantly , and the other thing is they want to get paid immediately . So , like yesterday , my painter's like you think I can get $13,000 from you .
I'm like dude , you're getting ahead of yourself , okay , right . But he's like yeah , well , I got to buy all you know , buy the paint . Come on , we all had you know accounts with the paint company . You go over there , you get the paint .
They give you a bill at the beginning of the next month for the prior month and then you got like 30 days to pay it . So they didn't have to give me the bullshit about you . You're not writing a check for the paint , I know that . But I gave him the 13 grad anyway Because I trust the guy . Yeah , and he will finish .
Yeah , you know , just trying to help him out Like maybe keep it going . Yeah , I just . But I want this is how I get fast service . Okay , that's the point of it . If you want people to jump through hoops , then you need to jump through hoops for them and recognize what they're going through , and so you already had all these people on Rolodex though .
Oh , absolutely yeah . So like that , you Nobody knew that I've never worked with when you're . When you were closing the house , you already had these folks and you said hey , on Thursday I'm with Exactly .
They were all lined up weeks in advance . As soon as I had a contract , I started calling them , saying Get ready , this is the day we close . I need you to be there .
Got it , and so everybody shows up . Yeah , that's such a time saver right there , because part of the problem with this stuff is the suck of time .
You cannot manage these jobs closely enough . I mean , that's the problem , like one of the reasons I got out of the business , aside from the fact that my wife hated it , which is a good enough reason , okay , and it's self . Let's face it . You know her . Yeah , I mean you don't want her to be unhappy . It's not going to forget what she told you yesterday .
No , she won't forget what she told you like six years ago , right , right , 10 years ago , understood , but it's you know just the amount of supervision and detail and how things go wrong . I mean it just amazes me the way people can mess up .
And so if you really want to get a good job and nobody's got really super detailed construction plans around here for anything that we do . I mean commercial jobs . Yeah , you generally have a better set of plans because you got registered architects and to do them you get a permit and generally have better subcontractors . So it's a little different world .
But residential it's like filled with incompetent thieves , Okay . And so you don't have good plans and that we don't necessarily have the best tradespeople either here , because this is not an old city where you've got like third generation carpenters and the hummers and stuff . You know what I mean .
Yeah , it's been passed through families . Yeah , it grows up lard in it . All the bells and whistles , they're just starting a business .
Yeah , exactly , and so I decided I'd make more money as an HVAC technician than I did working at the superior wheel plant , you know , and so they don't really know a lot some of them Right , and anyway it just takes this amount of time to supervise .
I mean , before , when we had our business , my carpenters told Sonia well , mark should come by three times a day . I'm like , first off , I'm traveling . I can't even go there every day . Secondly , I was like three-quarter time at the U of A and I've got this other business that's doing five to $10 million a year in revenue . I mean . I just can't .
Yeah , there's only so much you can do you can't full-time project .
Manage your jobs .
Yeah . So it just takes an unbelievable amount of supervision . And I could just tell you story after story , and even the simplest things . Like , we decided the shelf spacing in the pantry , okay . And then you come back and the guy is putting a three-inch band on the front of each shelf . No other shelf has a three-inch band , but a three-inch band , which ?
What does that do to the shelf ? It reduces the capacity of the shelves , so nothing's going to fit in the shelves . You'll have nine inches instead of 12 inches , right ? So your cereal boxes don't fit in there , you're right . Okay , so you're going to have your pop and lucky charms and all that , and so you will .
Unless you go by and you're managing this like you're not going to see the mistakes , it's going to get too far down the road . They're going to be painting it Now . You got to get the painters back over .
I mean , it's just Exactly , and then they get pissed because they don't want to rip anything out . Yeah , and it's just , it's horrible . So be there all the time , which means all your other shit is being compromised In a way because you're not devoting the time to it that you really need to .
You know , I know you've got a bunch of construction projects and stuff . Yeah , they have stuff going on .
Yeah .
I mean , it's been brutal , I'm sure and it's good just to hear this from me , though , because I mean somebody like you that's been doing it for so many years , like I feel like here's the problem and I think that this would be good for listeners is that if you do start these projects and you're just trying to get something done , like you might have a good
idea hey , I'm going to own my own business building . Yes , you know , great might make good sense , great wealth builder long term .
Yeah , absolutely yeah .
But you don't realize , like when you start getting into that , like just the amount of just questions , and then you have to go get permits pulled for this and right and something , and those final inspections from the fire marshal .
So who's holding you up ? Oh bro .
And then the city stamps the fire marshal stamp Right , and then they let you know you're finally in business . And that's been kind of my experience lately about the new studio we're doing , yeah , like I mean three months past what I thought that we should have been in the building and that's costing a fortune .
Of course it is . You're paying rent on the building all that time , and then your productivity is compromised .
And then you're losing business opportunities . What's the biggest thing ? Sure Right , All the excitement starts dripping
¶ General Contractor's Role in Construction
you know going down . Yes , and I just felt like I was an incompetent person , because of that .
You know you're not incompetent . They feel that way though . Well , it's just . The problem is that most of your contractors are incompetent when you come down to it , because they're not anticipating things . They go there , they do what they're going to do that day and they're not looking ahead , going okay , I'm going to need this material , I better order it now .
And because I need it in three weeks and the last time I went there to get it they told me it would be three weeks . Okay , they wait till the three weeks go by and they need it , and then they're like , oh , we don't have the material , it'll be three weeks .
Yeah .
I mean , it's just bad planning , not anticipating problems . Same thing with the fire marshal Get all that scheduled , yeah , so you know in advance . So who's responsible for that ? Like that's what I'm talking about . Do you have a general contractor ? Like no , Okay , You're the general contractor , I guess .
I guess I would just think , but I mean , I think that that's the thing is right , Like , I mean , like , like who is like in my business , right ? And then in what I've been doing , we have project managers that are somebody is laying out the timeline . It's like a freaking Gantt chart .
Yes , but I have yet to see a single Gantt chart from anybody in this industry . Nobody wants to own that , do they ?
Well , I mean , if you moved up the food chain to get commercial jobs , let's say you and I were going to go build a $10 million office building which , if we were doing anything , we should look at , because there you can actually get a good general contractor Well , first off you'll have better architects and engineers Okay , because it's a bigger job .
Then you get better contractors because it's a bigger job . They have professional management Okay . So you'll have a really good set of plans and specs , and then you'll have a project manager .
And then you know , if you pay your design professionals to do construction administration , then they are also looking out for your quality and so when you say design professionals is your architect , that's your engineer , architects and engineers .
Yeah , so you're a soft , what you call the soft part of the whole construction thing .
Yeah , which you know . I was in that business for years , of course as an owner and some firms and everything . But then when I'm a developer I hate to get paid out of time for soft cars .
That's the other part , right .
I'm sure you're the same , but if you don't have competent help there , then you end up paying for everything twice over anyway .
So in that situation , even in that situation like who's this general contractor ? Like if I Google right now general contractor Northwest Arkansas yeah , we got to find somebody that does office buildouts .
That's what you did there . You're in an existing building , you're doing an office buildout and there will be firms that should pop up based on that . General contractor .
Yep Office buildout Rogers , arkansas . I'm going to do that . Here's my results . I'm a general contractor Cross-Land .
Mark's Construction Cross-Land ? Yeah , they could do it . I don't know Mark's Construction , it's not me .
The Yelp . Well , that Angie List . No Clark contractors , and so the Mr Cleans home , no . Is that like a general contract .
It sounds like they need some help with their Google .
The Google results yeah , Search engine optimization yeah , SEO needed that For GCs . And I mean but like . But is the GC like a cross , like when these is cross-lane a general contractor ? Yes , they're a general .
They would do the managers .
All kinds of other stuff .
Yeah , they would be the managers of your job . They would and they would hire the subs and they would coordinate the job , gotcha .
So that's what I'm kind of figuring out is like a GC is actually baked in to the . They want to own the entire project . Yes , then they're the GC . So they're subcontracting all the tradespeople , even the engineering and the architecture as well .
No , that's if you go design bill , then they would Generally that'd be like contractor led design build , where they hire the architects and engineers too . Is that , is that a great deal ? Or you could have architect led design build where they hire the GC , it depends .
I mean , the problem is , you know , with design build , if you don't really know what the design details are , then it's up to them and they can cut corners . That's the deficiency of design build . It's like well , we thought you wanted this . If you have it designed , you've got a set of plans and specifications the contractor has to build according to those .
So it's almost best . Would you , if we had a raw piece of land and we wanted to build even just a house or even a course building ? Would it be best to go to architect day one ?
Probably . I mean , I'm not necessarily going to say for a house . That depends on the quality of the house you're going to build . You can't afford design professionals on a $250 a square foot subdivision house , probably Okay . Why ? Because they're going to be too expensive and they're going to design it in such a way that it costs more than that to build .
Okay . That's why you would probably just go get a builder quote , unquote which is basically a design build contractor .
So the builder that already has that's your spec . They'd have a spec .
Right , they generally would have like a spec and a budget . Yeah , like they go . Okay , well , the kitchen on this house . We're going to allot $35,000 for cabinets . Okay , here's a preliminary design for the layout of it , not detailed , it's like a schematic design .
That's what drives me crazy . There's no spreadsheet for anything Like as a as anybody that's going to build something . You cannot get your hands on anything that's got detailed spreadsheets of costs .
Well , they're , yeah . Well , the GC doesn't want to give you a breakdown . That's part of the problem .
Yeah , I mean they really don't because they want mystery in there , because that's what their lifestyle is , right . I mean , it's their business .
Right , and they want to have some latitude . Okay , to move the money around . They would rather give you a quote based on a price per square foot and then budget it , or a hard dollar bid to build your house .
But let's go back to the office for a minute , okay , because I do think an office building if you have a business whether it's a manufacturing business , or it's a business that needs warehouse space , or it's a business that needs office space or retail , depending on the business and what your growth trajectory is owning your own building or buildings can be a
really great way for the small business owner to build wealth over time . Yeah , okay . So instead of paying , let's say you've got a business that needs 30,000 square feet of office space . Yeah , you can go out there right now . In the market that we're in , you'd pay $25 to $30 a square foot for that for good space per year .
So if it was 30,000 square feet and you're paying $25 , that would be $75,750,000 , is that right ? Yeah , 30,000 square feet . You'd be paying $750,000 a year for rent . All right , okay . So that's a lot of money , right , mm-hmm ? And you get nothing at the end , right ? You're giving somebody else ? Yeah , you're just giving it to them .
Just make sure I did my math right on that 30,000 times 25 is yeah . Is that 75,000 ? No , that's 750,000 .
Did you say 35,000 ?
30,000 .
30,000 . Times 25 . 750,000 . Right .
So $750,000 a year you're paying out . You get nothing to show for it , right ?
¶ Planning a Commercial Building Construction
So let's say you decided we're gonna take a clean sheet of paper out , we're gonna go build ourselves a 30,000 square foot building , or better yet we're still growing . We don't wanna build what we need right now . Right now we need 30,000 , but we might need 50,000 in five years . So we're gonna go build a 50,000 square foot building .
We'll plan on occupying 30,000 of it or 35 by the time we get it done and move in , and we'll rent out the 15 or 20,000 , all right . So that's your basic problem , all right . So let's say you go out and find a piece of land you can buy for $2 million , okay . And then you design a 50,000, .
You have your architects design a 50,000 square foot office building . You find architects who specialize in new office construction . It's a specialty . It's like any other professional service provider and a lot of small businesses don't understand this , right , but I know you've experienced it . You wanna go to tourney for M&A ? You hire somebody that only does that .
You want somebody for real estate . You get an attorney who only does real estate . Same thing with architects and engineers , okay . Okay , I mean sure , some of the biggest companies do pretty much everything , but they'll have a whole group that is dedicated to new office construction . All right . So we find those architects and engineers .
We give them our basic program on what we want . We want 50,000 square feet . We wanna occupy 30,000 of it initially and 20,000 of it's gonna be rented space . That impacts the design . Obviously , right , let's say we don't want more than two floors , cause we know if we go too many floors each one develops its own personality . Yeah , All right .
So we're gonna do 50,000 square feet . We're gonna get 25,000 of our feet on the first floor and 5,000 the second floor . The rest of the second floor will be lease space . Or we do it the opposite way , right , mm-hmm . So we get with our architects and engineers and they , well , we take first , we've got our site we pay $2 million for .
We've consulted them along the way . So they say , yeah , we think this site would be good for a 30,000 , 50,000 square foot building . All right . So it's not like we just bought the land before we consulted them . That's step number one . Yeah , I mean the zoning's gotta be right .
It's gotta be have a buildable area that's sufficient for this building , because so can we hang out there for a second ?
Yeah , because that's really who do you consult with that , like I mean , so you need to engage , you really need to engage your architect and your engineer , right , you can find your team , yes , and , to your point , that's specialized in this type of stuff .
Yes , like the engineer would be somebody that just does like new commercial development projects .
Yeah , so you go find them and you meet with them , yep , and tell them all your ideas and stuff and they're gonna charge you a retainer .
It depends . They might charge you by the hour initially , or maybe they're willing to , you know , roll that all into their fee . Just to give you some quick advice . If they're gonna do any real work , they're gonna charge you .
Yeah , and so , okay , you get together that basic plan and then you need to go find you a real estate agent that goes and looks for the property that you're .
That you're wanting . Oh well , I was assuming in this case we already found some property . We thought , yeah , if we're talking about buying the property in the first place , yeah , absolutely . We get a good commercial real estate agent to find us a site that would support a 50,000 square foot building .
Yeah , because reason I was asking that is because there's zoning restrictions or all that kind of stuff , and if you're just somebody that's wanting to do this like you don't know all this stuff Right .
The architects and engineers do know that , though .
But then you gotta find somebody that's gonna actually go look for the property , because otherwise you're gonna be spending all your time looking for property .
Right , I was assuming in this example that we had a piece of property that we thought we wanted . Yeah , yeah , yeah . But yeah , you're right , I mean the first place is a really good commercial real estate agent who understands your goal and what you're trying to do .
Before we actually commit , though , we're gonna get our AE team involved right To make sure it's feasible there . They would do a feasibility study , basically , yeah , to determine whether or not we can put that building on that site with the adequate parking , meeting all the requirements of lot coverage ratio . So all this stuff .
So I could go talk to the AE . We partner up . I tell them the vision I'm paying them per hour . We develop up some preliminary vision Right . Go to the real estate person .
No , no , I'm not gonna design the building before I have the site . The first thing is the site .
But how are you gonna know what site you want if you don't know what you're gonna be building ?
Well , I'm gonna have a general idea . I see what you're saying . Yeah , yeah , yeah . But the last thing you wanna do is have a concept designed for a building and then look for a place to put it . You go the other way around you get your site , okay , and then you start to work on the concept for the building .
So if you find your site , though , and then you start talking with your AE's and you're paying them , but then they find out that that's not gonna work , Then you're not gonna close on it and you're out the money . But that's what agents ? That's the reason they're built on a more commission-based .
They get that right Like they're always the Well , the agents do they get that ?
Do they always know what's feasible there ? No , but a good one's gonna have a really good idea .
Yeah .
Okay , but yeah , I'm glad you you pointed that out . In the flaw , in what ? I'm saying Start with the site , finding the site and getting your AE team involved with a basic program for what you're trying to do . 50,000 square foot building on two floors Okay , okay .
How do you know ? So okay , so I don't almost say like the first thing to do is to find you a good commercial agent . If , like , in all honesty , if I'm starting from a blank slate and I got , so , I got myself and a few other folks that were wanting to put money in this .
You know , my business is going Right and I'm trying to find a new place for a studio and I just got this idea . That's the most the motion I wanna go because I wanna build wealth and I don't wanna pay somebody else , right , and you know , to this concept of talking about , I would go kinda have that idea . Go talk to find a good commercial agent .
Commercial agents like yeah , yeah , they seem to know that crap and then at the same time , when they start looking , I might go find my AE , right . And then they have a bring a meeting together with all of them Exactly . Okay , cool and then now your agents out looking and talking with some AE's .
So you kinda got your team Right , but you're gonna be paying your AE's a little bit , or a monthly or hourly payment , but not your agent .
Right . I mean you can find AE's that actually do site selection , okay . Okay , so they help . They'll go out and find all the sites that meet the criteria for what you wanna do . If you have good planners , okay . Are the planners part of the ?
AE's . Yeah , they're part of the AE's . Which ones do they belong to ? The architecture of the engineers .
They fit into both categories and landscape architects A lot of them are actually landscape architects . That are the planners . That are the planners . Those are the highly paid landscape architects . They don't do planting , they don't put shrubs around the building , they actually figure out what can be built somewhere . Really , yeah , those are the planners .
Where are those planning at ? Well , I had some of those as clients . They make a lot of money . Are they at the engineers ? They were for developers . Sometimes they're in engineering firms , sometimes they're out on their own , entirely . Okay . So , yeah , the good ones are entirely on their own . They don't wanna work under the domain of engineers .
How would you search the top of them ? Landscape planner , you would say landscape architect , slash planners . Again , you're probably gonna find a problem there , okay ?
And see this is . But this too , this whole conversation , is a problem . Yeah , that which I think stumbles growth right , because you've got some folks that are doing I'm doing a podcast studio .
Right , it's not what you know . It's not what I know . You gotta business , but what ?
I do know is in everything else on the planet . If I'm looking for something , I go to the Googles . I understand , oh , I'm hard to find .
Yeah .
And people are gonna be going to the AIS and the chat GPTs and saying and asking these questions you're rest nothing there .
It looks to me . Well , ignorance is a huge part of the problem . Are the AESide , and they don't do a good job educating people . No , no , about how everything works . But I mean , you have yet another option . You could find a development consultant . Okay , what are those people ? There's one in Fayetteville , for example .
That guy would help you with all this , I wanna show you what I got for landscape architects and planners Tree in scapes and limited Nope .
Not gonna be the right people .
Here we go in this PJ architects .
I don't know , zatar . There are firms like CEI , which is predominantly engineers , but they would do that , okay , you'd locally , yeah , okay , okay , um , even , um , like Harris and French AFA they would do . My son-in-law works over there as a development guy for site planning and he's a landscape architect .
So if a , if a small business person they'll walks in there and calls them , are they going to even entertain that Cause ? Most of these folks in our area we have an unenabled . You got the Walmart JV right , it's like you're a one-off .
Yeah , I think there's an end here , bro , there is no you're right there is . You got to find some smaller firms . But anyway , let's get past that part , which is a big part of this . It's going to come out right . That's the other frustration .
Okay , so once we get our site and we get it under contract and we know that we can build what we want to build there , okay , then the architects and engineers are going to design that fully Right , and they're going to prepare a set of plans and specifications .
If we're paying them a full fee for this job , which let's say , that's six to 8% of construction cost just to throw a number out of estimated construction cost , and let's say estimated construction cost for our building is 10 million , okay , 50,000 square feet , 200 bucks a foot , $10 million budget , 6% is going to be $600,000 , 8% to be 800 .
Okay , that's a lot of soft costs , admittedly , yes , but a good set of plans and specifications now allows us to put the job out for competitive bid , which means we can then get general contractors . Normally the AEs would do this for you . They put the job out to bid to GCs who make a hard dollar bid on it .
All right , you know they're all bidding on the same thing . Put the bid out to GCs . Yeah , they would put the set of plans and specs out . They'd advertise they're taking bids . So the GC general bid , they're taking bids .
So the GC general contractor , but that's a different type of GC than .
That's a general contractor who specializes in doing office buildings .
Because that general contractor knows all the subs is a general Okay . So that's the but . They're going off the spec , they're going after off the AE plans Correct .
The plans and specifications are designed by the AEs , so they're all bidding on the same thing . You know you're going to get the exact same product in theory from all of them . Okay , okay , yeah . Like it would say , like , use this doorknob and it's got the part number there . They can't just suddenly go get a different doorknob without your authorization .
All right , I mean , it's down to that level of detail . Okay , yeah , so they put it out for . So your good plans and specifications allow you to hire a contractor and know what you're going to get in the end and hopefully then , because you can put it out for competitive bids , you're going to save some money .
You're going to recoup some of that six or eight hundred thousand you spent .
Because that's going to drive down the overall cost per square foot for that GC . Yeah , but why ? How ? The AE's are not going to be incentivized by that dropping ?
The AE's have no incentive to do anything .
¶ Construction Cost and Contract Considerations
If I was an architect or engineer , I'd be like this is going to be $250 a square foot .
Right .
And then I'm going to send it out to bid and they're going to be once collecting those bids . Right , right , on my behalf as an emote owner , right , I would argue all day long to go with a guy that came back at $230 a square foot versus the one at 150 , because this one at 150 is incompetent from my perspective .
Well , yeah , and you do that sometimes , a lot of times they'll throw out the low bid , automatically , the lowest bid , especially if there's a big gap . Yeah , because you don't trust that . Right , like the one guy comes in at the one company comes in at $8 million and the next one is $9,800,000 . You'd probably throw the $8 million out or figure out .
Certainly want to talk with them , yeah , make sure they understood what they were bidding on , but don't they just get a little hurt .
The fact that I mean , if you did go with a lower bid , like I mean .
Well , it depends why the AE is getting paid . I mean , one way the AE gets paid is on a percentage of construction cost , right . Other way is a fixed fee . They say we're going to charge you $800,000 for this job Period . The construction cost doesn't matter . Yeah , you see what I mean . Yeah , so that's , that's a fixed fee AE contract .
So that does happen like that .
Because I've just think about your typical behavior of anybody that's in business . I would much rather have . I mean , if the construction cost is higher , I gain from that Like it's better worth my time .
Well , there are some firms that work like that . Mm-hmm One of the firms I work with , we call it the Bump . At the end of the job , the actual construction cost was compared to the budget , the fee they've been billed the client based on the budget . Okay , mm-hmm , the cost , but the actual cost ?
Then they just gross it up by their percentage and send them a bill , all right . So yeah , there are some firms that work like that . All depends on the type of contract you have with the AE .
So all right , so we were at the general contract . They send back the bid , but they're not sitting back any detail out of my bids , Like that's where I they may .
No , they may . They may have , they're a wide item . They may do it that way , yeah , but they may not . They may just give you a hard dollar price $9.8 million to build this based on these plans and specs . So they're detailed . So what's the ?
control being scope-create A lot crazy , a lot crazy , okay , well then , if you're going to change things along the way as the owner , then the GC is going to say change order , all right , and they're going to gig you for that In their contract . If you make any deviation from the plans and specs , then they want to be able to charge you a change order .
What do you do about , let's say , they stuck . So I'm thinking of this driveway . I'm trying to freaking build this whole mystery of how much labor it's going to cost , because we don't know until we start digging if we're going to be hitting rocks and all this other kind of stuff , and so I can't get my hands around a true cost of this thing .
Well , no , you can't .
Nobody's going to hard dollar bit that I mean . Having a really good set of plans from the engineer would be a good start , yeah .
I have that .
That's going to be a good start , but I think what you're finding is developing anything on a hillside is very expensive . So if I was out building new houses , why do you think the subdivision developers love all these flat lots , those hillside lots I did behind Common Go ? Those were so expensive to build . I mean we couldn't put a .
If you were going to build a $350,000 house , you'd have $200,000 in the foundation because of all the site engineering and requirements of the city . The road controls yes , the drainage planned by a professional engineer . The foundation is designed by a structural engineer . Geo tech boardings in order to make sure the foundation engineer can decide it right .
Then all the work to make the foundation .
That was a brutal project for you , wasn't it ?
Yep , I lost money on every house I did
¶ Financing a Building Construction
there . But anyway , let's go back to our example . We got bits on this building . Now let's say they came in at $10 million . We then build the damn building , all right . So how are we going to pay for that ? Well , the first thing is we're going to get a construction loan based on our preliminary plans and specs and our construction cost estimate .
Let's say that we gave those plans and specs to our bank . We haven't got a hard dollar bid on it yet . We give them to our bank and our bank has an appraiser say okay , what would this thing be worth ? Okay , based on your lease that you're going to give yourself , let's say you decide we're going to pay ourselves 30 bucks a foot .
This is really going to be great space , all right . So we're paying ourselves $90,000 or , excuse me , $900,000 a year in rent , okay . And we're going to rent the other 20,000 square feet for 30 bucks a foot , okay . So we're going to pick up another . Let's see 600,000 . So our total rent income is going to be $1.5 million for this , all right .
So now that goes to the appraiser , the commercial appraiser that your bank assigns to this deal . Okay , okay . And so what's going to happen is now we have total income of $1.5 million , right ? So let's say this is not a triple net lease .
Let's say , for the 30 bucks a foot , we're covering all the maintenance utilities and common area property insurance , snow plowing , whatever . All right , it's all rolled into the 30 bucks . Just to keep this simple , okay , so we're bringing in $1.5 million a year in rent .
Okay , the bank is going to say , okay , the appraiser , let's just say we're going to give these guys 85% of that because they're going to have as loan , no , just as income . Okay , we're going to allow this as income . Got it , got it . Got it 1.5 times 0.85 .
They got to pay property taxes , insurance , lawn care , painting , utilities on the common areas , lights in the parking lot and yada , yada , yada . Right , they come up with 1.275 million a year net . That's what you're going to net after your costs . All right . Then how do they come up with a value ?
Well , they say this will be a Class A office building in Northwest Arkansas , in a good town , rogers , arkansas . All right , now , it's not the same as saying Siloam Springs Okay , that's 20 miles away . It doesn't have the same economic situation we have here . All right , it's smaller .
It's going to be riskier to build the building over there that we'd find somebody who wants a 50,000 square foot building in Siloam than Rogers , where there's all these businesses flooding to the area . That impacts what's called the well . That impacts the cap rate , the capitalization rate .
So if it was in Rogers today , a Class A building it's a solid market , right Growing . Let's just say that you would have that the appraiser would allow a 6% cap rate . I'll explain this in a minute . Let's say , if you were doing it in Siloam , though , they would say , no , that's an 8% cap rate .
Okay , because I'm going to show you the difference in value . So 1.275 at a 6% cap rate , 1.275 million a year in income , after all expenses and allowing for some vacancy from time to time . Right , 85% of our million five . Okay , that divided by 0.06 . That gives us a number of 21,250,000 . Okay , okay .
Now if it was in Siloam Springs and I'm doing my 1.275,000 , and I don't know that this is what it is for Siloam , but I say , give a guess that divided by 0.08 , I get a number of 15,937,000 . You see how that impacted it . Yeah , $6 million in different value , okay , okay .
Now we know the land's going to cost more in Rogers , though that's a big chart of it . Right , yeah , so we're going to put this $10 million building and let's just say , for the sake of our example , it's going to cost us $6 million for the site . Okay , all right . So we're going to have $16 million in this deal .
Right , to build it , by the way , and everything Right , all right . Oh , and add the 800,000 for architects and engineers in there . We're going to have 1, . We're going to have 16,800,000 in it . Okay , okay , is that right ? Yeah , yeah , but 1.275,000 O divided by 0.06 , that gives us a 21,250 valuation . 21 million , 250,000 valuation . Take that minus 16,800 .
16 million , 16 million , I'm sorry , thank you , yeah , you're welcome . 16,800 . Now we get 4,450,000 left over . Okay , okay , so it's going to appraise at 4,450,000 more than it's going to cost us . Okay , this is how developers make money . Okay , all right . What can we borrow on that ? Well , they gave us an appraisal of what . What did I say ? 1.275 ?
What she's made ? 1,275,000,000 , 275,000 divided by 0.06 . They're giving us $21,250 valuation . The bank will lend us 80% of that . 21,000? , 21 million ? Okay , excuse me , 21 million , 250,000 . The bank will lend us 80% of that .
On a construction loan Okay , we use the construction loan to first buy the land , then to hire the architects and engineers , then build the building Okay , 21,250, . But they'll only give us 80% of that . Yeah , okay .
So that's $17 million is what they'll loan us for our estimated cost of 21,250 , for the appraisal excuse me , not cost appraised value of the building post construction .
Okay , so would you have to come out any money against that then ?
If I could build this for $16,800,000 , I would have $0 in it , other than the interest carry along the way on the construction loan , which would be an interest only loan . So for a period of maybe two years I'm paying first interest on the lot , then I'm paying interest on the construction as we draw on the line of credit . Okay .
So , as an investor , if I was trying to , if I was trying to build this , I'd get you myself , a couple other folks and we're going to . Basically our plan is to pay this interest and we're all committed to that .
If yeah , if we have to . Obviously we have to , though right , because they're going to start charging the interest on it . We're going to get 200 , if we did it for 16,000 , we got 200,000 left over . It's going to help us pay our interest along the way for part of it Not a lot .
So you'd have money in the bank to pay the interest .
We'd have some money . But yeah , ideally I mean most likely we're going to be coughing up the interest along the way . Yeah , okay , are you following this ?
example yeah , yeah , yeah .
Okay . So when it gets done , we move in , we lease up the other 20,000 square feet . We then convert our construction loan that was $17 million into permanent financing . Mm-hmm , the appraiser who did the original pre-construction appraisal , the subject to improvement appraisal yeah , we'll come out there and look at it .
Go to these guys , do what they said they would . Yeah , did they get the rents that they said they would ? Well , we know they did , because we're in control of our own lease . Right , we leased it from ourselves , right , even if it's a separate entity , right ?
Yeah .
Okay , so they go . Yeah , they did all that . Okay , fine . So now we turn the $17 million construction loan into an amortizing 25-year commercial mortgage .
Which is going to lower the well you're going to be paying the principal . Okay , go ahead .
Yeah , let's say that that's $17 million and let's say today , today's interest rates , maybe we can get that for seven and a half . You'd be a really strong credit to get that . But let's say you could get that for seven and a half million dollars , or 7.5% , rather interest .
Okay , now I'm going to see what I can get here , if I can find us a loan calculator , and I'll tell you what the payments would be A loan calculator we know we're bringing in 1.5 million a year in rent , less than 225 . So we're bringing in a net of a million 275 , right , mm-hmm ? So let's take a look at our loan here .
So we've got a loan for $17 million and let's say we got it on a 25-year term .
Okay , which would be high for commercial ?
though , wouldn't it ? No , you can get commercial for 25 years . Most of mine , I had 25 years , sometimes 20 , but mostly 25 . All right , and our interest rate is 7.5 . We're strong , the bank likes us , they're going to give us a deal , right ?
My point is so we're going to have a payment , though , okay , and hopefully that payment is not greater than our lease rate after all of our expenses . Now , at these high interest rates that we have today , it is a little harder than it was a few years ago , where you could get everything for 3.5% . Yeah , okay , Are you understanding how people do this ?
Yeah , yeah , this is how it's done . You know everybody's like well , I don't have the 20% , you don't need the 20% , you just need the credit .
Exactly , you need the credit , you need some collateral or the bank is using the land and the property and all that value .
Yeah , that's the collateral . That's the collateral .
But you can't just walk it Like you'd have to have some sort of esteem to the bank in order to do this , though right , I mean you Sure , right , I mean
¶ Real Estate Investing and Tax Strategies
like you can't . Just , I guess you have to build slowly and have a relationship with the bank to kind of build yourself up , to have that credibility .
Yes , to get into that . Yes , I always had really good credit . So even if I didn't have any cash , I always said this is really good credit . Yeah , I could get . I could go borrow $20 million , okay or more on a piece of property yeah , on real estate yeah , because I .
But , as you said , I did build that up over time and the banks had faith in me because I'd done this a lot . You see , okay , now , I'm getting close now and you'll interest rates in 0.5 amortization term 25 and calculate Okay , so this comes out with payments of 125,628 . All right , a month per month . Per month .
That includes principal and interest .
Yeah , that includes principal and it . So basically , if we had it fully leased out and we weren't paying any maintenance expenses , I don't know we would make the . We would be bringing in the rent that would cover the principal and interest and we'd be paying the maintenance out of our pocket . So maybe we need to charge ourselves a little more rent .
Okay , maybe we make ourselves pay the TII or whatever whatever they call it . That includes a factor for the insurance , property taxes , maintenance and everything else .
Maybe that's another percentage on top of our rent , like move to the triple net scenario , right , so it's on top of this , right the cover it .
So if we did that , then we would be able to pay for the whole deal and kind of have a little cash flow on it .
So you're making some income .
Right , we wouldn't really be making money , though , we'd just be covering our note .
And the reason you wanna do that is that eventually you're well , here's how this benefits us .
Let's say that you and I were the primary owners of the business that's gonna use this space , okay , right . And you and I are the owners of the building corporation , right ? So we've got this $22,500,000 building that we can depreciate over , let's say , 27 and a half years or whatever the allotted schedule is . I don't remember , I'm not a CPA .
Let's just say , for the sake of example , it's 27 and a half years . That means that we are gonna shelter about $900,000 of our income annually . So you own half the building , I own half the building . You get a statement that says 450,000 . I get one that says 450,000 loss . Let's say we each made a million dollars in our business for that year .
450,000 of our income just goes away . Yeah , you don't pay taxes , pay zero tax on it . Meanwhile , this building is growing in value , depreciating . So it's depreciating for tax purposes , but it's appreciating . So let's say we're there for 25 years . Even if we sell our business , we rent it out to the new owners , or maybe the firm we had eventually moves out .
We rent the whole thing out to different people . Over time we escalate our rents . Over time our value goes up based on those higher rents 25 years later . Let's just say , for the sake of example now instead of a $22 million building , we've got a $66 million building and it's paid off .
Okay , now you're cash flowing plus , you have that .
Huge asset . Huge asset . That's how you get rich over time as a small business by owning the real estate . It's a tax strategy . It's also a wealth building strategy . Okay , yeah . The problem is , when you go to sell the building , you've got a huge gain , obviously Okay . Then you got a huge tax burden .
So that's why a lot of people let's say , at the end of 25 years we got this building , it's paid off you and I both say we don't want this thing anymore . We sell it for the 66 million or whatever we get out of it , and we then take our money and we roll it into other things that are real estate related to save our tax , that's your tax .
31 exchange . That's your 1031 exchange . We don't want to show that gain , but we think apartments are great now . So we're going to go buy 200 apartments in South Florida and have a property manager , or we're going to put our money into a read or some kind of a fund that allows us to claim a 1031 on it .
To a read , did you say read Real estate investment trust Got it . Then we just have a portion of a bunch of properties out there Okay , that somebody's managing as a portfolio .
Maybe that can invest in other real estate Like you , basically become a minority shareholder in a bunch of other real estate .
Exactly . There are ways , I believe and again , I'm not a CPA but to get your 1031 money by doing that , mm-hmm Okay .
Yeah , because I think that part of this too , I mean like we can start talking about getting into estate planning , right , I mean like we may not want , like I mean if we pass away and our family gets that through the trust or whatever , like they may want to be cashing out , yeah , but if you did cash out on that , you would get hit with a capital gains
tax of Significant , which is 25 , what 25% right ?
26 ? I don't know . It changes every year . There's some kind of a scale , but I don't know what it is right now 20 , 25% , somewhere in that domain . Yeah , I mean this building we just sold . We're gonna get hit with 440,000 tax bill . It's selling for 3.5 , but it's depreciated value is 1.8 . So you take a million seven .
I guess it must be over 20% , Mm-hmm . Okay .
But in the midst of all this , I think the point of the conversation is this sounds great , right , yeah , but you have to be the one that freaking manages this whole process Like you are the one that's Driving it . That's driving it . I mean , and you gotta be all up in the middle of that business .
Right , and the downside of it is so , yeah , but again , if you're doing a project of this scale , you should be able to get decent architects and engineers and good general contractor that knows what they're doing . It's not like adding on your house . Yeah , right , where you got these guys ? I got a pickup truck and I got a license . I'm a licensed remodeler .
Lets me do projects up to 20,000 , but I'm gonna build your house . It doesn't matter . Okay , that's not .
So , but I mean On the big commercial side . I mean I think there are . It seems like what you're telling us is that from an industry , broader industry perspective , yeah , the pros are hanging out on the commercial side .
Exactly .
On the residential side . So now we're talking about something different . But there's a lot of folks that wanna get into residential or I mean even personal type stuff , or they're wanting to get into residential investing Right . That seems like that . That is the Wild West . No one has a freaking spreadsheet . No one's really GC in that at all .
If I'm wanting to remodel my house or if I wanna buy If they are , the cost is so high that it's hard for you to make money on it . I mean , there are people who just hired GCs to do everything .
Yeah , but then that's gonna graduate your cost per square foot yeah , it's gonna kill your , you're probably gonna lose some money , you know , because it's gonna cost you more , because the GCs getting paid roughly 15 to 20% of the project cost On top of what they're paying On top of what they're paying . Right .
So , like some residential builders were cost plus the way we did it . Only way we did it was cost plus . We never gave a hard dollar bid , so we would give you the invoice from the sub and mark it up by 20% and that was our fee . So if it's a $500,000 job , we're getting paid $600,000 . We make $100,000 .
Yeah , Okay , but that's gradually , I mean for the older , the more we spend , the more we get .
And everybody's incentivized to spend more money .
They are , but that , unless they , all are yeah , so that would .
that would cause me to go . I'm not gonna like then I'm not gonna get the general contractor .
I'll be the general contractor . I'll be general contractor Biggo . Now we're back to your driveway .
But then you're . But I think that what I'm struggling You're half a million dollar driveway Love . What I'm struggling with , what I'm struggling with is , like I'm just so used to in business , somebody having a pro forma , some sort of spreadsheet that's automizing the cost and I can see what I'm paying for .
I always did an estimate for clients . If I was doing it on a cost plus , it would have a breakdown in it .
Okay , but it's an estimate , but you , you're not gonna . But you're not gonna engage in that estimate unless you got the job right . You're not gonna go spend your time as a GC . Well , I got paid for that we got .
We charged for design and cost estimating , Then we charged 20% on top of the construction .
We were designed so there are people that might be out there that you could pay just to have this like a pro forma Correct Done about the project .
Yes , there are yeah , we charged for that . What did you charge ? It just depended . It was a flat fee based on the complexity of the job . I hated doing cost estimates , therefore they're gonna pay Okay . We had in house architecture . We were really a design build firm .
Okay , but how sophisticated is that estimation , though ? I mean like cause , I'm just thinking like again , like here's where my guy have understated . Okay , that's where my , that's where my frustration lies . It's like I can't get . I can't seem to find any truth or accuracy in any of this .
Here's the reason why you can't because we don't know with certainty . When we call Jose to give us a bid on your driveway , we think we know what you want for your driveway . We don't have great plans on your residential job . Typically , we don't know what we're gonna encounter out there .
We don't even know what the price of concrete is today , cause it's changing all the time . Okay , we don't even know if Jose is gonna be able to get concrete . Isn't that a freaking software for this stuff , man ? I'm sure there are people that do it . I constantly get emails from people in India and stuff .
I wanna do my cost estimating , but I don't trust them . Okay , and I know it's gonna be garbage , yeah , so you just have to . A lot of it is just based on a really good experience . Gc slash home builder is gonna have a pretty good idea of what things cost , based on certain rules of thumb .
Yeah , which then therefore puts the knowledge back in this person's head and where you have to have , as an owner and investor , you have to have a level of trust you do With that individual person Right , and that's to not freaking . Take you to the bank or have an absolutely devastating project .
Here's the truth . Now you do have to have trust and like you know . So let's say , I was doing a job , I'm building a new house for you , I'm charging you 20% . Okay , yeah , they go . Geez , that's a lot of money , mark whatever , okay . But then you do some research and find out that A the people that have our stuff like it , it holds up .
B if there's a problem , we're fixing it . Mm-hmm . C . We're generally pretty good on our cost estimating . Okay , this is you'd find that out by talking with people right that it used us and indeed the turn time D .
we're gonna get it done . The turn time is what we say It'll be me and all this stuff . Yeah , because the Because every month is more money , right , I mean like that's for me like a lot of the stuff , like just Like it gets brutal man .
In the old days we used to say price , schedule , quality , pick any two , yeah . In other words , I can give you a good price and I could maybe hit your schedule , but the quality is gonna suck . Or I could give you quality and schedule , but your price is gonna be high . You see what I mean ? Yeah , man , but yes , you're absolutely right .
So you gotta have a relationship of trust . But here's the thing I used to tell clients and this is not bullshit , it's true . So let's say , I'm charging you 20% to do what I'm doing . You're actually not paying 20% . You know why ? Why ? Because I'm gonna get that plumber cheaper than you are . Because he works for me every day .
He's gonna give me a lower price than you . He knows I'm gonna have my site prepped , it's gonna be clean , I'm gonna take care of them . But you're not gonna pad that though . No , I'm not padding . And whatever the cost of the plumber , you're gonna pay 20% . I'm gonna give you the backup .
Okay , so I'm gonna get my painter cheaper than you are , because my painter doesn't know how to market . He doesn't want . He knows I pay his bills . He doesn't wanna work for other builders .
So he's gonna hook you up Right . It's everything that he does .
I'm just saying in theory , like my Rufor , I'm gonna get Rufing far cheaper than you can buy Rufing for , because the same guy's done 100 roofs for me and he knows I don't jerk him around . Okay , so let's say , of the 20% , maybe I'm saving you 10% . Now I'm only costing you 10% , yeah . The other thing is I get to buy stuff cheaper . Why is that ?
I've got an account at the lumber store . If I pay him in 10 days , I get 2% off . Yeah , okay , so I could save you another 2% there . You're not going to get that as a homeowner .
You see what I mean . Yeah , you go down the home depot when you're paying full retail right .
So I've got a commercial account at Wayfair . Even if you like , order lights or plumbing , whatever , I get it cheaper .
So how does our audience get in touch with you for their next project ? Do not call me .
I mean the business 20 years ago . It used to really be fun . We did one project at a time , I had my own carpenters .
Everything was great when I'm met you . You were rocking at Roller . Yeah , we were , but that was fun for you then it was fun , do ?
you had five , ten million bucks a year in revenue and doing really high quality .
¶ Importance of Good People in Business
What really hurt us was when I came back to Swag Group yeah , and then my lead carpenter died a couple years later .
Yeah , jack , jack , that hurt everything , okay that's because you had somebody as a GC . You had a Carpenter , I had a superintendent jack superintendent , that was a really good carpenter dude . He was .
I mean , he's a cool dude , anything , jack , it'd be like he was such a positive guy like you'd say jack , can we do that ? Oh , yeah , we can do that . I mean the whole house is like Falling off its foundations Seven inches out of level . We have to jack the whole thing up , dig everything out , putting and put a foundation under it , lower it back down .
Sure , we can do that while the house is falling apart . You know , no problem . I mean , he just never broke a sweat , he was a positive . Yeah , can do get it done .
Yeah , you know , the central theme of what we're talking about today is what we talk about and value basically every episode . It's about good people . Man , oh man , I'm telling you all the businesses are period I had good people .
It's so true . I saw something I linked in today that was like , as a startup , what's the most important thing ? You know your lender , your investors , your customers , your people . I said people . Yeah , I was in the minority . With the good people , you can overcome anything you really can and that .
And that doesn't mean finding the the brightest , smartest person that's ever existed , actually that's I mean I know we can . We can have an episode about that .
Well , we need to talk about what kind of people we really want in our businesses . I can say I could answer that real quick .
Okay , attitude , good advice with good attitude , just like you're talking about jack positivity , can do , get her done , can do is everything .
It is , man , I , I'm very frustrated with somebody . I'm not going to mention you , because they'll listen and then say it's them , yeah , but they'll give you every reason why you can't do something . I can't , and I , I'm , I'm Absolutely at my limit . They stay for , even to the point where they start forgetting whose team they're on .
Totally Okay , it's like a mud in the p . The enemy is outside the company , that inside , that's right .
That's right . So and folks got to . You know there's . I have some examples too and I won't mention too much . But People can get too wrapped up into the black and white , the pressure of business and Shut their door .
I've seen people change like legitimately change and they get wrapped up and they lost their luster , yep of life and in in they discount that value To the other people in the organization . That's the problem is their cancer .
They're even attitude spreads to other people . It's like , well , maybe I can't do it , maybe management really is screwed up , maybe management doesn't know what they're doing , maybe Management's going the wrong way . Okay , and that skepticism and I'm smarter than yes is a big problem .
Dude , I tell you like it is , and it's not that hard to just Laughter .
Yeah having fun you are the best at that . Thanks , man . It's always fun with you , like I'm just we're also serious as hell .
Yeah , but I'm I have realized like To walk in a room every circumstance possible To have a little bit of laughter and smiling is what it's all freaking about . I am . It keeps you things 100% percent , man .
I'm so with you . That's why it was so much fun to work with you .
Yeah , man , because we only do you know freaking . I mean , it didn't matter what the hell was going on . The whole world's candy we owe so much to so many , right , but we still freaking laugh , right , it's just , it's it . It's almost like this whole episode , like I'm sitting here dealing with this other stuff .
Yeah , come here to big talk and I'll actually consider it therapeutic Because we can have a real conversation and I'm feeling like a freaking human again .
I wish we could carry this conversation on longer . We're gonna have to pick it up again , because I do want to talk about employees . Okay , and and I think I think it'll be good for some people to listen- yes if they want to get ahead and maybe be a firm owner or entrepreneur someday , mm-hmm , I think we can help them . I think so too .
You know , I think so too , but now we're out of time and I gotta go meet an electrician . Damn it on my job site , yeah , so anyway . Well , listen everybody um . We appreciate your tuning in . Yes please check us out at www . Big talk about smallbusinesscom .
There's a dot in there after the w . Oh yeah , and I'm not here to judge you .
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Business . Thank y'all .
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