JF2194: Important Development Deal Steps With Shane Melanson
Shane is a full-time commercial real estate developer who started investing in 2004 and dived into commercial real estate in 2007. Shane goes step by step on how he goes through a development deal by utilizing one of his very own deals and sharing the details.
Shane Melanson Real Estate Background:
- Full-time commercial real estate developer
- Started real estate investing in 2004 & specifically has 13 years of commercial real estate experience
- Portfolio consist of an Apartment building, retail property, and several rental properties and development land
- Based in Calgary, Alberta
- Say hi to him at: https://shanemelanson.com/
- Best Ever Book: Keys to the vault
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Best Ever Tweet:
“Just because you think there is a market, doesn’t mean there is, you have to verify before you proceed” – Shane Melanson
Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m Theo Hicks and today I’m speaking with Shane Melanson. Shane, how are you doing today?
Shane Melanson: I’m doing great, Theo. Thanks for asking.
Theo Hicks: Well, thanks for joining us. Looking forward to our conversation. Before we get into that, a little bit about Shane’s background – he is a full time commercial real estate developer, he started real estate investing in 2004, and he has 13 years of commercial real estate experience. His portfolio consists of apartment buildings, retail property, several rental properties, and developed land. He is based in Calgary, Alberta, and you say hi to him at shanemelanson.com. So Shane, could you tell us a little bit more about your background and what you’re focused on today?
Shane Melanson: Sure. My background is, I grew up in a small town. So I wasn’t born into developing or investing in commercial real estate. Both my parents were teachers, and when I grew up, most of the jobs I did were labor. I built logging roads and… Anyways, probably my first year of university, I was back in Whitecourt, and I was working for a good friend of mine, his dad, building roads. My buddy, who is quite entrepreneurial and pretty successful, probably five or six years older than me, brought an investment opportunity to my dad and myself. Just to condense it, the deal didn’t work out. I put all $13,000, which for a 19-year-old kid or 18-year-old kid, that’s a lot of money. But my dad, he remortgaged his house and put $100,000 into that investment, and unfortunately, just saw it evaporate. So they had just paid off their home, and now he was going to spend the next ten years – he was a principal, my mom is a grade one teacher – to pay off that mistake. So that set me on a bit of a different tangent, where I thought the only way to be wealthy was to work hard and save money, but that only gets you so far.
So I think I was in my fourth year of university. Well, I took longer in university because I partied and worked multiple jobs. But my best friend at the time, I was living with him, and he was investing in residential real estate, and he had about three or four homes and I was noticing that he was living– he had no payments, because he had roommates that were paying for his mortgage. He invited me to a real estate conference up here in Canada called REin. So I went to it, I started to learn more about this concept of investing in real estate. I was still very jaded from losing money in the past. But I realized that if I was going to get ahead, that I needed to expand beyond just trading time for money. So I got into fixing and flipping. I went full into real estate. I got my real estate license, my mortgage license, I worked as an appraiser or an assessor, I should say. Then I was in urban planning. I got a job at Sun Life. That was where I got into commercial real estate. There I was a lender, and I was in a meeting one day with two gentlemen that were syndicating a real estate deal that was about $12 or $13 million. They were maybe 10, 15 years older than myself, but I learned that you could pull money from high net worth individuals and buy these larger properties. But it was wasn’t until I met my father-in-law that I was actually able to do a deal like that myself. So I tried to compress my history into how I get into commercial real estate…
Theo Hicks: Perfect. Thanks for sharing. So maybe tell us a little bit about what you’re doing now.
Shane Melanson: Sure. So today, what I do primarily is… Well, between 2016 and 2019, I was doing mainly developments, and the reason for that was, I found the market to be hyper-competitive and I was looking for a way to leverage the skillset that I had, and that was going out and finding opportunities. So for example, we found three acres of industrial land by the airport. We tied it up for four months, spent some money, call it $30,000 to $40,000 probably or more on architectural plans, drawings, marketing material, and we pre-sold 70% before we removed conditions. So this was an off-market deal, or maybe better to call it a pocket listing from residential brokers that were trying to do more commercial. So that was deal number one. We ended up pre-selling the entire building by the time we closed.
So our risk then, was really on execution because my partner Jason, who’s got a lot of development experience – and I’ve got some, but he’s really more the hands-on and I was more on the money-raising, marketing, selling and negotiating with the tenants… That was a very good deal. We sold out in, I think, 16 months. Sold out, meaning that the actual condo units were sold off to the end-user. And then we found a retail property. We secured an anchor tenant there; that’s on about two acres, and we’re just actually developing phase two. I’ve got offers on multifamily and to do some land development for purpose-built, smaller, under 50-unit multifamily right now here in Calgary. So that’s what I’m up to.
Theo Hicks: Do you mind walking us through with more specifics on that first deal you were talking about? Maybe some numbers as well?
Shane Melanson: Sure. We bought 2.9 acres. I think it was $925 an acre. Our construction hard costs were about $135 a foot, and then obviously, you have soft costs. So let’s just say the all-in number on 30… There’s differences between what was the gross square footage versus the net square footage in terms of what you actually sell, but let’s just call it 35,000 square feet, and we were selling anywhere from $300 to $340 a square foot, depending on the size of the bay, the location, and these were small bay industrial warehouses. So a person might say, “Wow, $300 bucks sounds like a lot per square foot.” We have to remember these were three buildings, so you have less economies of scale. Number two, you’ve got smaller base, so a lot more demising walls, more HVAC rooftop units. So all this adds to the cost of being able to do an industrial development. We also didn’t have the– what’s the correct term. Our site coverage was much less than you would have in, say, a typical industrial development. You might see 40% to 44% site coverage. But because this was more retail office industrial, we were closer to 30% or 29.5%, I think, was the actual site coverage. So your cost per square foot of land goes up. If you look at $925 an acre, we’re probably $64 to $66 per square foot. So happy to break it down into more detail or walk you through how that deal all came together, but–
Theo Hicks: I’m curious to see how that came together because again, I’m not as familiar with development deals. I think our audiences isn’t as well. So maybe try to look at the specific numbers. Maybe walk us through more specifically how you found it. And then after you found it, you said you held it out for a little while and spent money on certain things. What happens during that process? And then maybe take us more like a step by step process through that deal.
Shane Melanson: Sure. So this deal, the step by step was two gentlemen brought us the opportunity Like I said, it was off-market. It was owned by a very large developer. So generally, in those situations, you don’t get to negotiate much on price. We tried, but they said, “Here, take it or leave it.” So we said, “Okay, you want the price. I want terms.” So we tied it up for four months, because I learned on a previous development where I was involved, I was the CEO of a company where we did 1,153 acres resorts in Ontario. So in that deal, what I learned very quickly was just because you think there’s a market, you have to verify it, and the only way to verify it is to actually get money and deposits. So what we did is, we said, “We think that the market is x and we tested it, and we were wrong. The market wasn’t 3,000 to 5,000 square foot base. It was 1,350 to 1800 square foot base.” And really what that meant was a price point under $500,000. So what I did is I said, “Okay, based on that, let’s design three buildings so that we can maximize the site coverage. Here’s the renderings,” and we told our brokers — even though I’m a licensed commercial real estate agent, I could have done that, I didn’t have the relationships in that area of Calgary. So we essentially gave up, whatever you want to call it, paid our brokers very well, about $550,000, I think, in commissions. But they were responsible for profits of over $2 million.
So four months due diligence, multiple iterations, going back to the market, and really, I think it’s important having proper expectations of what an agent does. An agent is there to get the deal, to bring two parties together, and then it was really up to my partner and I to negotiate and make sure that those deals a, closed and b, we were designing buildings that these guys were going to be able to occupy and run their businesses out of.
Theo Hicks: I just want to jump in really quickly. So you’re talking about this broker is with the people who are going to actually lease or buy the [unintelligible [00:12:01].20] once they’re developed. Is that what you’re saying?
Shane Melanson: That’s correct. Yeah. So the broker that brought us the land also went out and pre-sold these units. So when I say pre-sold, they’re no different than when you could build a rental apartment building or you could build for sale, for condos. This was a condominiumized industrial building, and there was 24 units. So we needed about 70% pre-sales before a, we could get construction financing and b, before I felt comfortable going out and raising capital from investors because I didn’t want — a, I wasn’t gonna build it on spec, or speculating that we could sell it. So really, it was relying on our agents to bring us qualified buyers and we secured those with letters of intent, and then switch to purchase and sale agreements. We put the money in escrow, and that was verification that there was demand for the product we were building.
Theo Hicks: So did you actually get the money first?
Shane Melanson: Well, there’s different ways… The money goes into our lawyers’ trust account, and there are ways that developers can access it. We didn’t want to jump through those hoops, so we raised money from our investors. I think in this deal, we raised $2.7 million. So that meant we bought the land outright, and we have money for soft costs. The deposits were there and we did not draw down on them. We had a construction loan from our bank, RBC. So once you hit certain milestones, you’re able to start drawing down. So I want to say, in this case, we were able to build those three buildings, including site work in under 11 months. I think it was even closer to eight months once we started actually doing the construction.
But I think it’s important for people to know that there was about a six-month period where you’re going in for development permits. In here in Calgary, you have what’s called the DSSP, which is your deep services plan, about how water is going to move around on your site. And that took four months, about three months longer than we had anticipated.
Shane Melanson: So in Calgary, one of the other things is you’ve got winter. So all of a sudden, you’ve got a fixed price contract from your general contractor, but that doesn’t include heating and hoarding. So if you’re building and pouring concrete, for example, in the winter, tack on 80,000 bucks plus or minus or more if you’re pouring concrete, doing taping and mudding… So there’s a lot of things that a developer learns when you’re getting into a deal, and I think one of the biggest mistakes I see newer developers or builders making is thinking because they’ve got a fixed price contract, that they’re set. The reality is that there’s a lot of exclusions in those contracts, number one. And then number two, you’re dealing with people. So just because you think someone’s going to show up, a trade is going to do their job, there’s mistakes. And is that trade gonna honor their work? Are they going to come back and fix it? Or are you, the developer, going to be left high and dry? And fortunately, we had an excellent general contractor. Some of the trades squeezed us, so you’ve got to absorb that.
Theo Hicks: So you said it takes 11 months to build the buildings, correct?
Shane Melanson: Yeah, even less than that, actually. Because when you’re just doing steel frame, they go up pretty quick.
Theo Hicks: Okay. So then, once you’re done, at that point, are you completely out of this deal. You get your money, do you pay off the loan, and you’re out completely?
Shane Melanson: In that case, because they were industrial condos, that’s right. Now let’s say, we own one or two, we wouldn’t be able to get out. Now, we also had to set up a condo board, so we had to sit on the board for a year, but we brought in a property manager. But for all intents and purposes, we got our money, we paid our investors back, we closed down the companies and you move on to the next deal. So the next one, the retail I’m working on, that is for lease. So we will keep that and if someone comes along and offers us too much money, we’ll probably sell, but we’re very happy with our tenants and [unintelligible [00:15:38].16] there.
Theo Hicks: So we at Ashcroft do apartment syndications. So obviously the type of person, at least from what I understand, the type of person who invests in apartment syndications have different goals than the type of people who invest in these development deals. So what are the goals of your investors? When you’re talking to them, when they’re trying to figure out if investing in your development deals is going to be a good fit, what are the types of things that they’re saying, that makes you say, “Okay, they’re a good fit,” and maybe what are some things that they say that makes you think that they’re not a good fit?
Shane Melanson: Well, I do multifamily syndications as well, and I would say that the profile of the investors is they’re looking for good returns. In my experience, these investors, high net worth individuals, they’re really betting on the team and their ability to execute. So obviously, if you’re buying a value-add multifamily that has maybe 6% to 10% cash on cash returns and a 15% IRR, well, much less risk. If I’m doing a development deal, these guys are looking for 25% to 35% returns because they understand that there’s more risk. So we explain that upfront and we show them the downside. We show them, “Look, I’ve got my house on the line, and we’re mitigating risks in as many places as possible.” So for example, pre-sales, pre-leasing, you want to verify that demand as much as possible to give comfort both to myself and to my investors.
I think the other thing I would say is some investors– you’re right, I’m very careful. So if someone wants to come into one of these deals, has never invested in commercial real estate, is just looking at the big cash on cash or IRR, and they don’t have an appreciation for the fact that it’s illiquid and they’re putting in their last $100,000 or $150,000, generally speaking, those would not be good investors. Most of the investors I’m dealing with, I would say 70% of the people that come into my deal are either developers themselves, some of them are on publicly traded companies, doctors, dentists, that have a significant net worth, and are looking at this as just another avenue to invest with higher returns, and really they’re betting on the team and a track record.
Theo Hicks: Okay, Shane, what is your best real estate investing advice ever?
Shane Melanson: I think the best real estate advice I could give someone is that this business is a relationship business, and one of the things that helps me in all of my deals is the fact that I don’t have an ego in the sense that I think I have all the answers. So like I just alluded to, if I’m doing a deal, I’m going to triangulate all my information from mortgage brokers to lawyers to lenders to other developers, and I’m going to also get people with skin in the game that have experience in commercial real estate to guide me and make sure that I’m not making a mistake… Because it’s very easy to fool yourself into thinking you have a great deal, but you really want to test that, and the best way to do it is just from your relationships in the business.
Theo Hicks: Okay Shane, are you ready for the Best Ever lightning round?
Shane Melanson: Let’s do it.
Theo Hicks: Okay, Shane, what is the best ever book you’ve recently read?
Shane Melanson: I think the best ever book is a book that I’m reading right now for a second time by Keith Cunningham. Keys to the Vault, I believe it’s called.
Theo Hicks: If your business were to collapse today, what would you do next?
Shane Melanson: I would probably go back to commercial brokerage and continuing to help people buy and sell in commercial real estate.
Theo Hicks: What is the best ever way you like to give back?
Shane Melanson: There’s a couple of things, but one of them is through the Junior Achievers here in Calgary. Going in and specifically with grade sixers, talking about entrepreneurship as well as some of the stuff that I do with respect to how to invest in real estate.
Theo Hicks: And then lastly, what is the best place to reach you?
Shane Melanson: Best place is my website, shanemelanson.com. There, you can find my podcast, my book, all that stuff.
Theo Hicks: Well Shane, I appreciate you coming on the show and talking to us today about your background, what you’re doing today, and then your best ever advice. I always enjoy having conversations with people on here that do things that I have very, very minimal knowledge on. So I definitely learned a lot today.
So you walked us through your first deals that you did by yourself, the 2.9-acre deal where you turned it into three different industrial buildings. Something that I thought was interesting, and I really want to think on of myself more is when you talked about how you learned that you need to verify that there is a need, a demand in the market, that you have the right need and demand in the market. So for this deal, you originally thought that it was going to be larger base.
Shane Melanson: That’s right.
Theo Hicks: And then once you actually went through your month of due diligence, you realized that the demand was actually for smaller base. So you do that before you actually go out and raise capital and before you actually start building. You don’t assume you know what you’re doing. So I thought that was very interesting. I’m sure there’s ways that everyone listening, no matter what type of real estate niche you’re investing in, you’re gonna find a way to apply that to your business. I really appreciate you showing that.
And also, you talked about the brokers and how you yourself had a broker’s license, and you could have technically, legally done the pre-sales and gone out and found buyers, but you didn’t really know the market that well, and you knew that you could pay a broker really well, and they’d go out there and make sure that they find you qualified buyers. That you were able to get the pre-sales you needed to order to qualify for financing, and that sure, you pay them upfront a lot, but the ROI from that would be much higher. So you gave us numbers on that as well. And then you also talked about the investor profile for a developer and how typically they’re experienced in developments. It’s not someone who’s putting in their last dollars into a deal and hope to hit it big, and that they are expecting higher returns compared to your value add apartment syndication because of the higher risks involved.
And then your best ever advice which was that this is a relationship business, which I talked about in your broker advice, and then that you realized that you don’t have all the answers and making sure that you’re triangulating and getting all the information you need from the brokers and the lenders and the contractors. And then you also try to work with someone else who has experienced in developments, they have skin in the deal, and that they can guide you so you don’t make any massive mistakes. I really like that. I really like all of the advice that you gave. I’m sure the Best Ever listeners did as well. So again, Shane, thanks for joining us today. Best Ever listeners, as always, thank you for listening. Have a best ever day and we will talk to you tomorrow.
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