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>> Hey, everybody. Welcome back to Business of Architecture. This is Enoch. Today, weíre
joined again by Matthew Segal. Heís the COO of Jonathan Segal Architect, working in San
Diego, California. Matthew Segal just recently completed his own development project. He
works for a firm that does integrated design-build and architecture, and he actually has a project
that he developed, I guess, on the side? Matthew?
>> Yeah, on the side.
>> Yeah. So, first of all, welcome back to the show. We look forward to talking with
you about the project that you developed.
>> Thank you. Itís great to be back on.
>> So, tell us about this project. Give us a little overview of what it is and where
itís at.
>> Itís a 1950ís building that used to be a post office in Golden Hill, San Diego, just
east of downtown. I converted the existing building to three units, and then I added
the unit out back over parking.
>> Okay. Youíve been out of school for how long?
>> I think it just came up on three years.
>> Okay. How long have you known that you wanted to do your own development project?
>> I wanted to do it when I was in college, but combining that with school and play was
a little bit more difficult than I expected.
>> Okay. Then, during the looking process, how many other properties did you look at
before you finally homed in on this one? Whatís that process like?
>> You know, one of my dadís closest friends told me that he wakes up every morning and
looks on LoopNet. I started doing that, and that actually helped a lot. There was a property
I was looking at in the neighborhood that had been for sale for some obscene amount
ñ Iím going to say, twice of what I paid for it. The lady sat on it, nobody made any
offers. Then, she dropped the price 30%, and still no offers. She dropped it another 10%
or 15%, then the offers came in floods. So, I was able to secure that property that I
was actually probably looking at for a year and a half or so.
>> Okay. Do you remember any of the other products you looked at and, sort of, passed
on, and what that process was like?
>> Yeah. I looked at a couple of pieces of dirt. I looked at, possibly, just rehabbing
some existing buildings like six-unit, little bungalow, etc. But, for me, to qualify for
that dollar amount, it starts to get too high. Even though I had my dad cosign on my building,
thereís a certain threshold where I just didnít feel comfortable with the financial
obligation.
>> So, weíre those other projects significantly greater in terms of scope?
>> Yeah. They probably have been more like six or eight units instead of four.
>> Gotcha. Now, I believe ñ and correct me if Iím wrong ñ before you do a project,
can you do an FHA loan?
>> You can. You can do one to four units with an FHA loan.
>> Okay. Is that a good deal?
>> You know I didnít actually end up doing it. I got an ordinary construction loan. From
what I understand, itís a fantastic deal. Itís a lot of paperwork, a lot of front-loading
everything. Then, you can only have so many draws. So, just understand the specifics of
that. One of my fatherís friends actually did that on a project and it worked out great
for them. Although, some of the contractors got frustrated because the architect-developer
didnít have the ability to take out the money and pay them as frequently as somebody with
a normal construction loan where you essentially have unlimited draws and you just pay for
them each time.
>> So, they were waiting for their money for longer periods of time.
>> Correct. I think, possibly, you only get four draws.
>> Okay.
>> Actually, I think, on my project only took three draws just because I didnít want to
pay for it, and I was able to money borrow money, etc. But, just be careful.
>> We have to apologize for our viewers who are overseas or in other countries where the
laws and the lending environment might be different. But, if youíre listening to this,
pipe in on the podcast page and tell us if you have any equivalent loans to this in your
country. Like, I wonder in the U.K, or Australia, South Africa what kind of loans they have
that are similar to the FHA. With that said, Matthew, give us a little background of what
you understand the FHA is and some of the advantages why someone might want to use one
of those if they are in the U.S.
>> Well, from what I understand, the FHA is a loan you can put as little as 3.5% down.
Essentially, itís the government wanting to instill redevelopment of neighborhoods.
So, youíre allowed to buy up to four-unit project or buy a one unit project and up to
three units to that. Itís based on area. So, I think, in my area with a four-unit project,
I can get a loan of $1.3 or $1.2 million. I donít remember exactly, but one unit, two
units, three units, and four units are based on the cost of living and certain frameworks
that the government sets in those neighborhoods. So, every zone has a different dollar amount.
Just be aware of that if you are looking at that.
>> Okay. That sounds pretty incredible ñ 3% versusÖ For a conventional loan, whatís
the going rate for the down payment?
>> I think I ended up putting 25% or 30% down.
>> Yeah, 20% to 30%. So, that would beÖ
>> Go ahead, sorry.
>> No, the lingo ñ LTV, right? So 70/30?
>> Yeah. Maybe closer to 60% depending on who your bank is.
>> Yeah, exactly. So, you were looking on the net, you saw some of these other projects
that were too much. This one, youíve been watching it for awhile, and you said that
she started out high with the price.
>> Yeah.
>> And you had seen it dropped. So, in your mind youíre thinking, ìThis is getting sweeter.
Iím going to keep my eye on this.î
>> Yeah, and it finally got sweet enough where it, sort of, made sense. At that point, I
called the brokers on the property and talked to them about. I said, ìWhat does it take
to buy this building?î and he said X, but she wants a quick close. I think because I
offered that quick close ñ I think it was a fifteen-day look and a thirty-day close,
or fifteen/fifteen, I canít remember exactly right now ñ I won the property. I think her
backup offer was maybe $5,000 ñ $10,000 higher, and it was a sixty-day look and a thirty-day
close. She was an elderly lady. I think she was ninety-two years old. Actually, the day
I was supposed to close, escrow, nobody could find her, and they were concerned that she
actually passed away.
>> Thatís a great story.
>> Yeah. Itís pretty interesting. They didnít really know what they were going to do if
that had happened, but she finally called in. She had actually been at her vacation
home in Palm Springs.
>> Man, that is an active ninety-two year old woman.
>> Yeah.
>> I hope when Iím ninety-two Iím in Palm Springs.
>> Yeah.
>> So, thatís the day of the close?
>> That was the day of the close, yeah.
>> So, was that a little stressful? They canít locate the owner, youíre thinking, ìOh,
great. Weíve got to get these papers signed.î
>> Yeah, I was a little stressed. I canít remember exactly the logistics, but there
was a way to actually close if we needed to.
>> Okay.
>> I guess it transfers to her daughter or her son immediately, or however that works.
>> Okay. Now, what kind of knowledge did you have in your head understanding the value
of the property to know what you wanted to pay for it? What is that process like ñ of
penciling it out and figuring out, ìOkay, this is the value. This is what I want to
pay for this and offer for this projectî?
>> Well, basically, my dad has trained me to, first of all, look at the parking situation.
Determine the maximum parking because thatís really the deciding factor on how many units
you can have on the property, regardless of whether or not thatís feasible. You go backwards
from the parking. So, I determine the maximum parking based on maximum parking and the unit
aggregation. Four or three bedrooms were the most cost-effective, profitable manner to
park in to the house at site.
>> So, when you say ìparkingÖî Let me just rephrase what youíre talking about. I mean,
it sounds simple. I just want to make sure I have it straight. How many cars can fit
in the site without having part of the building or something?
>> Correct.
>> Looking where the drive approach is, and try to figure out how the cars sit on the
site.
>> Yeah, in this instance. I mean, regardless of whether itís a rehab of an existing building
or new property ñ it always starts with the parking in our firm.
>> Okay. So, with this new project, what did you discover about the parking? How many cars
could they park and how many were required for the unit mix?
>> Itís in a transit zone which gives you reduction, but it was 2.0 per a three-bedroom.
I had eight parking spots, all tandems; thankfully because itís a transit zone. So, eight locations
and four slots, if that make sense.
>> Yeah.
>> Those actually tuck under the building in the rear, [Inaudible] design.
>> Okay. So, ìtandemî is one car in front of the other, correct? You basically have
four spaces 40 ft deep, or whatís the size of those?
>> 36 ft.
>> 36 ft?
>> Yup.
>> Okay. Since weíre talking about the parking now, walk us through the project. What does
it look like? Iíll splice in the photos. So, talk to us about the building, about the
project.
>> Yeah. So, basically because of the parking and the existing envelope of the building,
I built a three-bedroom unit that was raised off the ground out back. I maintained the
rear loading dock as, sort of, an entryway to the back two units. I try to utilize as
much of the existing building as possible. Essentially, itís an existing building shell
with a cross inside to divide up the rooms or a T inside. At the front thereís a unit,
a three-bedroom. Then, at the back to the north and south are also three-bedrooms with
little courtyards, and there was [cutting end 00:35:26] of the roof. If you look on
FancyLofts.com there are floor plans if youíre interested too.
>> Awesome. What interesting design things did you do to add some value to those spaces?
>> Adding some value cost a lot of money. I added patios which ended up necessitating
cutting off the brand new roof of the building, adding straps, and basically having to retrofit
seismically the building because of this design decision. So, the benefit was definitely there.
I made the units fantastic inside, but the cost of it was very expensive.
>> Do you think it was worth it?
>> I think so, yeah. The units would have been bigger interior space-wise in the back,
but I donít think they were to have the same volume feel, and people use their patios too.
One of the tenants actually strung Christmas lights. The volumes, I think, of the patios
are 12 x 11, and the roof line is 13 ft to 15 ft in the air. So, you get this nice, vertical
volume that the sky is framed by it. So, itís really nice and allows you to have private
>> Awesome. So, if you wouldnít have cut out those patios, would you then have been
okay just leaving the buildings as is and not having to seismically retro-fit it?
>> For the most part, yeah. It would have probably saved me $50,000.
>> Wow, okay. Well, take me back to the process. You talked about talking to the broker, he
said, ìHey, listen, itís got to be a fast close.î You put in your offer, she accepted
your offer. Youíre scrambling. I mean, thatís an extremely fast close. What did you have
to get down in that time period to close the deal?
>> I had to have a bank loan. I had to have investors, which happen to be family and friends
ñ fantastic coincidence that they were interested in investing with me, somebody just graduated
from college. They were promissory notes; they didnít have any ties to anything that
I own, or my parents own, or anybody else. I had to have a design scheme, a pro forma,
a Phase I, which is basically the historic loan analysis of the site and any issues.
A title report to make sure that the title is clean. In this instance, because it was
an existing building, I had to have a hazmat survey to determine what was toxic ñ lead,
etc. I think that encapsulates everything.
>> Okay. What was the hardest of all those things, from your perspective?
>> I think the biggest learning process was the bank loan.
>> Yeah.
>> I was very, very scared that it wasnít going to get done in time. The banker, although
it worked out very well, was very difficult to, sort of, tie down a real date.
>> Yeah. That sounds hairy, especially if you have such a quick close.
>> Yeah.
>> So, tell me where you got the money from. Give us an idea of how much of your own, personal
money you used, how you got that money, and how you structured the deal just to pull all
these together and incentivize investors to come on board.
>> Yeah. I borrowed [Inaudible] numbers. Itís been a while and Iím a little tired, but
I think, I put in $60,000 of my own money, which I made conveniently on Apple stock.
I borrowed $240,000 from two people ñ $130,000 from one, and $110,000 from the other. Is
that right? I canít remember now, to be honest. Itís all blurred ñ the three numbers in
my head. SorryÖ $150,000 and $110,000, so $260,000 I borrowed.
>> Okay.
>> I gave them a point to sign up, and then 10% annual interest. Then, I got a bank loan
for $690,000.
>> Okay. Then, you had also had a co-signer on the loan.
>> Correct ñ on the bank loan.
>> Yeah, on the bank loan. Was there a personal guarantee on that loan?
>> You know, I think, my dad may have had to sign a personal guarantee, sort of, as
a recourse loan. >> Yeah. I heard being a lineman is a good
job, just as a side note.
>> Yeah. Iíd love to sign up for that.
>> So, is that where the three-storey unit is, in the back at the parking? Where is that
line?
>> That was at the back, over the parking area.
>> Okay. So, you paid $7,000 to move that.
>> Yeah.
>> Then, you talked about having to do some structural retrofit and to the building. Did
you have that cost factored in or was that, sort of, like, ìOh, manÖî?
>> That was a surprise too. Basically, Iím used to budgeting on larger projects. This
is a surprise. When you have a larger project, you are able to, sort of, defer these costs
over more units like a twenty-seven-unit project. The water meter for instance. I didnít realize
I have to buy new water meter. Mine was a three quarter inch; I needed a one inch because
of the fire service. So, I ended up paying, I think, it was in the neighborhood of $20,000
for a water meter and water credit units, etc. So, that was a surprise. So, when you
divide it over four units, $5,000 a unit, it adds up really quickly. But, if you divide
it over twenty-seven, itís nominal.
>> Yeah. That $20,000 hickey.
>> Yeah. So, I was definitely way over budget. But, I think the product turned out pretty
nice in the end.
>> Okay. Now, how did that affect the loan? Did you have any contingency built in to the
loan? What would you recommend other architects do that want to go this route in terms of
the amount of loan they should take out?
>> I was beyond my loan. I was able to use my credit cards to, sort of, float things
in the process. Thatís one of the biggest things I recommend. Plus, I have frequent
flyer miles to fly around the world twice now. But, make sure your credit line on your
credit card is big enough because that buys you an extra sixty days. I paid them off every
month. So, itís fantastic. Itís basically free money for thirty days ñ really sixty
days because youíre able to put out the bill another thirty. So, credit cards are fantastic.
What else?
>> Well, speaking of the credit card how does that work? Who pays it off? Where does the
money come from to pay off the credit cards?
>> Well, I have investment from those two investors and my own money. I had a fluff
there of, I think, around a $100,000 that I would draw out of. That would get me to
the next bank draw. So, I really, basically, pushed all my overdues to the very last minute.
I had to take out one more loan at the end because I had to pay people off because that
period was just short. Between when I was anticipating getting my permanent financing,
I ended up selling. But, when I was just thinking of getting my permanent financing, I had a
one to two-month period with another loan of $70,000 roughly at 10%. So, it was a nominal
fee to actually carry all those people and get all my subs paid.
>> Okay. So, that loan was because youíre over budget to make up the difference?
>> Yeah, exactly.
>> Okay. Then, what did that loan look like? Was that a personal loan?
>> Yeah. I borrowed from my parents and my sister.
>> Oh, nice.
>> I probably could have gone back to my investors and asked for more money, but I didnít want
to scare them.
>> Yeah. Man, there is some serious love in that family.
>> Thereís a lot of love ñ probably too much. They wanted the interest immediately
after though, let me tell you.
>> Did they get the bookies on you?
>> Yeah, pretty much.
>> Nice. What did you offer them? You said 10%.
>> Same, exact terms that I had with my other investors.
>> 10%, okay.
>> I probably could have called other people if I needed to, but I need the money quick.
>> Okay. What lesson did you learn from building the project?
>> You really need to be there the whole time. I was working for my dad probably four to
six hours a day, and at my job four to eight hours a day, and vice versa. I was burning
myself out and I wasnít catching things that I should have been catching. So, I definitely
recommend either you somehow are financially solvent enough to be able to be there full
time, or really understand that youíre going to be diminishing your capability to catch
things on one or the other job.
>> Okay. When you say ìcatch things,î what kind of things that were worrisome to you
that you found?
>> You know, missing hold downs, missing fire caulking, things like that. One of the bedrooms
was framed wrong. I should have caught it. Immediately after they framed it, I walked
in and, ìOh, this is way off. This wall should have been a foot and half in the other direction.î
I was able to, sort of, adapt it and make it work because it would have been a ton of
work for them to take it out. Thatís where the relationship would be developed. They
take care of you and you take care of them. So, in those instances, I didnít make the
framer move the wall. That would have probably been two days worth of work.
>> Alright. So, be there as much as you can.
>> Yeah.
>> What other insights can you share about building a project?
>> I just think walking it at least twice a day, really understanding what youíre doing.
In my position, I was able to change things just as my dad taught me. So, as the building
was progressing, I was changing things. I noticed that one of the walls wasnít designed
correctly by the engineer, or it was correct but they had too much deflection. So, I paid
an extra $1,000 or $1,500 for the framer to put a post or a beam across it, so that this
two-storey wall in the back unit wasnít flexing almost an inch.
>> Wow. So, is that stucco portion finished on that?
>> That was actually the metal. So, it wouldnít have mattered too much, but dry wall probably
would have been cracking on the inside.
>> Okay. Now, tell me about the finish that you used, and the window wall systems. What
did you find out? Did you find any good deals on stuff or do anything creative there?
>> Yeah. Itís interesting. When you start to look at the cost of everythingÖ A window
wall or a storefront system probably cost, at least in San Diego, in the neighborhood
of $16 to $22 per sq ft. Stucco was probably $4 to $6 per sq ft, maybe closer to $7 when
you include the plywood that we typically put underneath it. You start to have these
cost-benefit analyses where you say, ìOkay. Maybe itís better if I eliminate the stucco
there and put a window on it instead,î or things like that. Sometimes you realize that
the cost to change some of these things is so nominal and the benefit is so great that
itís a simple decision.
>> Nice. So, you might say, ìOkay. It might be $5,000 more to stick in a window wall system
here, shoot, itís going to add to the space.î
>> Correct. In the front of the building, the post office used to have this 4 ft wall
that ran across with a storefront above it. I was standing there and I happen to have
a *** on the site that day, and my saw cutter guy was there that day too. Just coincidence,
all the stars aligned. My window guy came up and he said, ìYou know, it would be easier
for me if you just knock that wall out and I ran floor to ceiling glass.î I said, ìGreat.
Whatís it going to cost?î Nothing. Itíll save me a ton of time. I said, ìPerfect.î
Got the Bobcat, drove over, my sawcutter saw and cut the left side, pulled the wall out,
dumped it on my trailer, my guys took it to the dump, and the window wall went floor to
ceiling; huge difference in the space too.
>> Awesome. So, originally that was just going to be a partial window.
>> Correct. Probably got a 6 ft window instead of a 10 ft window.
>> Nice. Now, I know you were thinking about living in the project originally.
>> Yeah.
>> Did you ever do that?
>> No, I never actually did. To get an FHA loan, you have to actually be an occupant
on the property. So, that was my intention in the event that I was going to get an FHA
loan, but I didnít. I ended up selling the property because I couldnít get the FHA loan,
and I couldnít get a conventional loan either.
>> Okay. Tell us about the close off process, then. Tell us about what happened there when
the project was finishing up and your exit.
>> Yeah. So, basically, the projectís value based on an income stream, which is rental
income, was far greater than any comparables in the neighborhood. So, my building that
should be worth somewhere between $1.5 and 1.7 million based on the incredible rents
that I got was actually appraised at a $1 million and $1.1 million. So, that really
hurt me on the takeout loan. Basically, it wasnít feasible to get a takeout loan because
my cost has exceeded that.
>> Let me pause you there for a second. What were the comparable rents in that area that
they were looking at?
>> The rents were similar, but because it was a one to four-unit project, they donít
base it on rent ñ they base it only on comparables.
>> Oh, okay. So, actual sales of other buildings.
>> Itís a residential loan instead of a commercial loan at that point. If you have five units
and greater, itís a commercial loan. Theyíll base it on a combination of comparables and
income stream, but primarily income stream.
>> Okay. On the flipside, with your project they based it strictly onÖ?
>> Okay. How many other buildings had sold in the past year or two, probably last year?
>> Basically, nothing that was getting those rents that I was getting. Theyíre all, sort
of, like duplex houses, etc, in the neighborhood. So, there was nothing with the, kind of, special
qualities in my building.
>> Okay. Incredible. So, that appraisal came in, it was less, probably than the money you
needed to get out of the product to pay off your investors and close the deal.
>> Yeah. It was less than the cost of the project.
>> Wow. Youíre faced with this, what did you do?
>> I was pretty frustrated. My only real option was either to take on a partner and have the
cash down on the deal, or sell the building. I ended up selling the building. I made out
well, really well. The buyer made out really well too. It was a quick close; it was a thirty-day
>> Okay.
>> I was, literally, just about to go to market when this person called me and told me they
were interested in buying it.
>> Nice. Okay. Tell me about the timeline when you decided, ìOkay. We got this appraisal
back. Itís way too low. We canít do this. I want to sell the building.î What are the
next steps that youíre taking to get that building on the market? What are you doing?
>> I didnít interview, but I contacted four brokers in San Diego that I felt were adequately
capable of selling the project.
>> What made them capable in our eyes?
>> They know the neighborhood, they understand the product, and they have a history of selling
buildings of the similar type ñ just a feeling in it. There are a lot of *** brokers out
there. Fortunately, in the past few years, we found some incredible brokers that are
really good people, and generally care about their clients, and their buyers and sellers.
>> Okay. So, you identified these four brokers, called them up, asked them, and told them
about the project.
>> Yup. I just want to ask them what their feeling was, what did they think the value
was with the rents. They all told me it was going to be difficult to sell because there
was no comparables in the neighborhood. So, that would have to be almost a 100% cash buy,
which I ended up selling to. They developed, sort of, a full market package, ìHey, this
neighborhood. I ended up selling it for $1.475 million as a concession because the buyers
>> Okay. So, youíre getting ready to sell the building. Tell me how this person contacted
should buy the post office.î He said, ìThatís a great idea. Get Matthew to send me everything.
Iíll take a look at it tonight.î He did. Then, he called me the next day, heís like,
ìWe need to make this happen.î So, it was just progressing from there.
>> How did they feel about the price youíre asking for the project?
>> He, actually, is a big-time developer, works for [Inaudible] so he gets it, which
was fantastic. He actually offered, I think, $1.525/$1.550 million. I canít remember.
I, again, as a concession brought it down to $1.475 million. When they got their appraisal,
which came in extremely low, the dad was having some heartburn, some sceptics of what was
actually going to be happening.
>> Okay. So, the dad, from whom the money was coming from, was having some misgivings
when he saw the low appraisal come in.
>> Yeah. Itís, ìWhoa! Why am I paying $400,000 more than the appraisal?î $1.475 million
sounded a lot better to him than a $1.525 million.
>> Okay. Who made the call to the father to explain that and, sort of, sell him on the
deal?
>> His son.
>> Okay. Awesome.
>> Yeah.
>> I mean, the value of relationships, right?
>> Yeah, definitely.
>> Cool. Well, is there anything we left out about the Fancy Lofts, Matthew ñ about your
experience developing that project?
>> No. I havenít done it yet, but I think itís also important for architects to learn
really hope that you've got something out of this show that can help you have more success
and profit in the world of architecture. If you want to join the discussion about this
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>> The views expressed on this show by my guests do not represent those of the host,
and I make no representation, guarantee, promise, agreement, affirmation, pledge, warranty,
contract, bond, commitment except to help architects conquer the world. Bump music credit
to Ben Folds Five - Do It Anyway.