JF2251: Ground Up Syndications With Shannon Robnett #SituationSaturday

October 31, 2020 | joefairless | 00:26:20

JF2251: Ground Up Syndications With Shannon Robnett #SituationSaturday

Shannon is a full-time real estate investor and developer with over 21 years of investing experience. He has a portfolio that consists of buildings, police departments, fire stations, city halls, residential, and much more. Shannon focuses on developing syndications from the ground up for his investors and today he shares his journey into this niche.

Shannon Robnett  Real Estate Background:

  • Full-time real estate investor and developer
  • Investing for over 21+ years
  • Portfolio consist of office buildings, police depts, fire stations, city halls, subdivisions, residential, commercial, & industrial
  • Based in Nampa, ID
  • Say hi to him at: www.shannonrobnett.com  
  • Best Ever Book: Never Split the Difference 

Click here for more info on groundbreaker.co

 

Best Ever Tweet:

“Starting over wouldn’t be the end of the world because I would put one foot in front of the other and start building” – Shannon Robnett


TRANSCRIPTION

Theo Hicks: Hello, best ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks and today, we will be speaking with Shannon Robnett.

Shannon, how’re you doing today?

Shannon Robnett: Good, Theo. Thanks for having me on the show.

Theo Hicks: Absolutely. Thanks for joining us. Looking forward to our conversation. A little bit more about Shannon. He’s a full-time real estate investor and developer with over 21 years of experience. His portfolio consists of office buildings, police departments, fire stations, city halls, subdivisions, residential, commercial and industrial. He is based in Nampa, Idaho. And you can say hi to him at his website, which is https://www.shannonrobnett.com/.

So Shannon, do you mind telling us a little bit more about your background and what you’re focused on today?

Shannon Robnett: Sure, Theo. I grew up in a real estate family. My mom is a third-generation realtor. And my son is a fifth-generation. My father was a commercial builder. I was the kid that saw his first 1031 at probably 13 years old, probably not appropriate for a child to see that. But that was the kind of stuff that I saw growing up at the dinner table, the conversations that were had. And so as I grew up and I started trying to pursue things on my own, I saw where development was something that kind of came naturally, because we had clients that were looking for buildings or clients that were looking for offices and they couldn’t necessarily find what they wanted or there wasn’t land available. So we would buy that, we would develop it, we would build the office, we would have some excess land to do another deal or two on, and that just kind of grew into what we do today.

Through that process, we kind of involved a few partners here and a few partners there, and as that began to grow, we quickly found ourselves with more deals than dollars. So we’ve stepped into the syndication process and are doing ground-up syndications now all across the Treasure Valley.

Theo Hicks: Thanks for sharing that. So you said that when you first got into development, it was because you actually had a customer that needed a property that did not exist. So, is that what you still do today? You build based off of what someone else wants or are you building and then selling to someone after it’s already created?

Shannon Robnett: We do two things. We build for other people… So currently, I’m building about 140 doors worth of apartments – some seniors, some regular – for customers. But we also have about 230 that we’re doing for our own development, where we build them, fill them and then look to resell them based on market value.

Theo Hicks:  Which one is the majority of your business, the building for other people or then building and then selling afterwards?

Shannon Robnett: Well, in the last two years, our business has swung, as our syndication ability to syndicate product has gotten a little bit better; we are now able to bring on more projects. And we’ve got about 1,000 doors in our pipeline that we’ll bring through our syndication program over the next year and a half.  That will all be ground-up, and we’ll eventually phase out building for other people because it just won’t be necessary.

Theo Hicks: Got it. So let’s focus on the building for yourself, in a sense, the syndications. So what type of compensation is typically offered to people who invest? Because my background would be in the apartment syndications that are already built, five-year hold periods, preferred returns, profit splits… Is that is same way it works for development, or are people who invest in development deals getting a different type of compensation structure?

Shannon Robnett: Well, Theo, if you think about that for a minute, when you’re getting into the deal that you’ve just described, you’re trying to blend the person that is in their mid-30s, let’s say, that is looking to grow their real estate value or grow their net worth, and you also have the gentleman or the woman that’s in her late 60s, early 70s that wants to live off of the money that’s coming in every month. And you’re trying to blend those two and get those to fit into a scenario where you’re giving enough on the cash on cash return to attract maybe the more well-heeled investor that has a little bit more cash to deal with, and yet, you’re also trying to get enough growth in there that is attractive to people that are trying to grow their net worth.

In the ground-up development, we’re different in a couple of ways, because we’re not necessarily chasing the forced appreciation. I think the market that we’re looking at right now, a lot of people that were planning on forced appreciation are becoming very surprised in the fact that they’re lucky to maintain the rents that they were getting prior to COVID. So forcing appreciation really isn’t the thing that that people are doing right now. And typically, you’re trying to score an apartment that is at value or maybe a little bit undervalued, but there’s things that you can do to bring it up to value.

We’re looking at something where by assembling the sticks and stones, we look at the appraised value, and there’s typically between 20% and 30% difference between the cost to construct and the appraised value. The beautiful thing about an appraisal is it’s an independent third party that’s taking a good hard look at it and gone with historical fact, on what rents are, not what you hope rents to be.

So we were able to put together a project, we just broke ground on it two weeks ago, that we had a cost to build all in of $5.3 million; our finished appraised value at rents from the appraisal that was done in December of ’19 put the project’s value at $6.3 million. So we can see that there was clearly some definite profits there. And then we just look at bringing that to a stabilized place, and then once we reach stabilization, and we’ve achieved the goals of the syndication, then that project gets sold and we harvest there.

The typical times — this particular one I just described is 36 units; that’s about a 12 to 14 month period of time that our investors are involved, and the return on that will be mid-20s for that period of time. And most of our clients are using a self-directed IRA product, so that they’re bringing it right back into their IRA portfolio and not having to deal with the tax implications that come with not holding the project for three to five years.

Theo Hicks: So your strategy, just to confirm – you build it, you stabilize it and then you sell it.

Shannon Robnett: That’s correct.

Theo Hicks: Okay. From my understanding, I thought that developers would typically build it and then sell it while it was vacant. Am I wrong there, or do people also do that, and you just do this strategy because you’re able to make more money from it that way?

Shannon Robnett: Yeah… When you look at it, Theo, I think there’s money to be made in the ground. The guy that sold me the ground, he made some money; building the buildings makes some money, filling the buildings makes some money… I just see that taking it from the raw ground to the stabilized product where you’re able to sell it on a cap rate, you’re able to maximize the dollars that go into it. So you could build it and sell it during construction. I do get offers all the time on product that’s underway. But it’s hard to convince someone that it’s going to rent for this, so the easiest thing to do is to prove the rents… And then somebody can step in, just like somebody can buy a value add project, they can buy this one, it’s brand new, they can pay top dollar for it, they could know that for 10 years or 12 years they’re not going to have repairs to be done to it. Brand new roof, brand new air conditioning systems – all of those things. So it makes it a different kind of an investor that buys that… And they tend to pay a little bit more for that.

Theo Hicks: Once the property is actually built, who is responsible for stabilizing it? Do you have your own in-house management company, or is there a third party you partner with? And then based off of your answer, why did you choose one over the other?

Shannon Robnett: Well, we do all of our own in-house management. And the reason that we do that is because as you know, cap rates are what rule the game on industrial and multifamily properties. In fact, when I started out, I had another property management company that was a friend of a friend, and they did such a horrible job. So I went out and I hired the guy that I knew that was the best at it. And the very first thing that he told me was, “We need to make this about a choice.” And I said, “What do you mean?” He said, “There’s four other complexes right around yours that are brand new.” And he said, “We need to make this about a $35 choice, where we are $35 more than the guy next door. That’s a couple of cups of Starbucks coffee, but when people will make the choice to rent with you, regardless of that $35, they’ll stay longer and they’ll be better tenants, because there’s something about your particular complex that they like better than the others.”

Well, that has proven itself to be very, very true, so we have a lower turnover rate. But you also look at that and you take that — the complex that he started with me on it was 180 units. Getting $35 a door more than the competition put our value on that particular project alone at the same cap rate as the park project next door at $1,000,007 more, just because of that one piece of advice.

So Jeff has done a lot to help us grow that, because we have control of that. We’re not necessarily offering the concessions that the guy next door is to rapidly fill, because we’re managing an asset for the sales price that’s tied to the cap rate based on the NOI.

Theo Hicks: Okay, I understand the calculation; same cap rate, the greater the NOI, the greater the value of the property. And you also mentioned the benefits of having that higher cost. But my question is, what specifically is your management company doing in order to demand that extra rent, compared to what the competition is doing? Is it just a higher quality product? Do you offer different amenities? What types of things differentiate your property from the competitors that allow you to get that premium rent?

Shannon Robnett: Well, the thing that we start with is your experience the minute you come to our properties. We interview our personnel to make sure that they have the type of personality we want. We want somebody that’s warm and inviting, professional, follows up to the point that you’re not wondering where the property management company was on getting back to you on the results of your application, or anything like that.

So we tend to hire a better quality of staff, so that your experience once you come to our property is to know that we’re all about property management. We’re not doing it as some function of, well, this is what we have to do. But we go after a certain personality to make sure that that experience is awesome.

And as you know, everybody builds a different product for a different reason because they feel that that’s the best. Just like cars, not everybody’s going to pick the same car. But what we’re looking at is maybe we’re closer to your job or maybe we’re closer to your grocery store of choice, or your gym or your church. There’s a lot of reasons why people pick apartment complexes, and it has a lot to do with the experience that they have, and what they feel is the amenity mix that they’re looking for. So we just go out of our way to make that the best customer experience that they can have, and I think it shows. We have better reviews than the surrounding properties on our stuff. We tend to make sure especially with what’s going on with the world right now, that our tenants feel like they’re our customers. We’re really working with them to get through this time. They’re not just a number of somebody that can be evicted and we can go on to what’s next. It’s not the right experience to give them.

Theo Hicks: My second product question was, you said 12 to 14 months is kind of typical hold period. So do you mind breaking down that, from raw land to when it’s completed, from when it’s completed to when it’s stabilized, and from when it’s stabilized to when it’s sold? How long do these stages take?

Shannon Robnett: The current project we were discussing is a 36-unit ground up. We’ve got another one that’s a 2000-unit that it’ll take about two and a half years. But it takes about six months to build a twelveplex. So we started that project, we’ll begin to sanitize those as soon as the buildings are done individually, so we will start bringing tenants into that environment in about seven and a half months, eight months, nine months, 10 months. We’ll probably reach 95% occupancy on that 36 unit project.

We’ll give it a couple of months so that if someone wants agency debt, you can now get the 221(d)(4) program done with 90 days of occupancy over 90%. So we’ll season it for that period of time so that it’s available for the optimum financing. And we want to make sure we close out at least a full three-quarters of bookkeeping, so that we’ve got enough records there that we’re in a sense, bankable. So that’s the process. And we’ll give it three to six months of stabilization as we take it to market, so that by the time the transaction is closed, it’s usually been stabilized for about nine months. So nine months to build, it goes under contract in three to five months and then it’s closed, usually by month 15 or 18.

Theo Hicks: And then the people who are investing, do they start getting paid once it’s built, once it’s stabilized or once it’s sold?

Shannon Robnett: The way that we do that is it’s just about a payment when it’s sold. So they are getting an 8% pref in this particular case, and then they’re getting a rather large percentage of the profits at the point that it’s sold. So with the guaranteed GMAX on the contractor side, it’s pretty easy to see how that comes out. And then if we’re able to get higher than projected rents, then obviously they get higher than projected returns.

Theo Hicks: And then the last question before the money question, what is your process for selling these on the back end? Is there like a preferred broker you use? And then at what point in the process do you typically have that buyer? I guess what I mean is when you start seeing interest in the property, and then when do you start actually taking action against that interest? Because you already mentioned that people will start expressing interest while it’s being built. So, are those people put on a list, and you mail it out that list to everyone who’s expressed interest? How does that process work?

Shannon Robnett: You’ve seen that happen quite a bit where you do a call for offers. We don’t really do that, but we do market it once we have reached stabilization. So once we have filled 90% of the units and we know what our exact rate calculation is, and then we can get into the nitty-gritty of what our NOI is going to be – once we have that, then we can put out a number that nobody needs to be disputing. And then at that point, we will contact all the brokers in our area, we will contact a couple of national brokers, let them know what we have, and then just see what happens there. That usually only takes about two and a half weeks to put that property under contract, because they’re brand new, they come tenantized; there’s not a lot of risk to it. So at that point, we’re able to usually attract some really good offers on the property.

Theo Hicks: Okay, Shannon, what is your best real estate investing advice ever?

Shannon Robnett: Do your due diligence. Know what you’re getting into long before you get into it, because once you’re in it, you’re creating solutions to maybe get out of it or not lose, or whatever. But the more time you spend on your due diligence, the better prepared you’re going to be… Because it doesn’t matter what deal I’ve ever done, there’s always something in it wasn’t anticipated. So the more of that that you can spend the time to uncover before you pull the trigger on it and make that baby yours, the better prepared you’re going to be to face what you’re going to uncover at some point.

Theo Hicks: Alrighty, are you ready for the best ever lightning round?

Shannon Robnett: Sure.

Theo Hicks: Alright.

Break: [00:18:54] to [00:19:36].

Theo Hicks: Okay, Shannon, what is the best ever book you’ve recently read?

Shannon Robnett: Never Split the Difference with Chris Voss. I just finished and it was excellent. I haven’t had the chance to use the principles, but it was an excellent book. I look forward to it.

Theo Hicks: If your business were to collapse today, what would you do next?

Shannon Robnett: Build it again. I build things, so for me, starting over wouldn’t be the end of the world. You just put one foot in front of the other and get started.

Theo Hicks: If you don’t mind, could you tell us about a time that you lost money on a deal, how much you lost and then what lessons you learned?

Shannon Robnett: Well, if you’ve been in this game for very long, you will definitely encounter that. I had a deal that I did, it was a two-warehouse deal I put together, and I had pre-sold it. I did one of those things that we talked about in the show, where I pre-sold it to a guy at a certain price, and it took about five months longer than I had anticipated to build it, the tenants wanted some other things, I wasn’t keeping a microscope on the cost… And yet, I already had a fixed price on the other end. It did really well for the investor, because he was able to get a much higher rent out of his tenant because of the things that I did, because I wasn’t watching the costs on that. And then when I sold it, my price was fixed and I lost about $200,000 on that particular deal. It was really hard to walk away from closing after doing all the work, building a couple of buildings, getting all the tenants in there and knowing for about the last two months that this was happening, that I was going to lose 200k.

Theo Hicks: And on the opposite end of the spectrum, tell us about the best deal you’ve ever done. And that could be best in regards to money, or something else.

Shannon Robnett: It’s kind of hard to beat – I think the very first deal I ever did was one of the best. I think it has a lot to do with the nostalgia, because it was my first real estate deal. I was working on a job, and I was talking to my crane operator on the job, and he was looking for a place to put his cranes and everything, and he needed a yard, and he was looking for something maybe with an old house on it that he can create an office out of. And the little old lady next door and her son came to me and said, “Hey, you don’t know anybody that would want to buy our three acres here and our house?” And I thought, “Gee, this is perfect.”

So I was 20 years old at the time, and I wrote an earnest money check that wasn’t my last $500 deal, it was my only $500. I was newly married. I had no money. I wrote this check. I knew that it wasn’t going to bounce, but I knew I wasn’t going to have anything left. But three months later, when I closed that deal, I bought the place from the lady the same day that I sold it to the crane operator, so I never took possession of property. And that 500 bucks made me 80 grand in 1996. That was a lot of money, and one of the best returns I’ve made on a $500 investment.

Theo Hicks: Wow. What is the best ever way you like to give back?

Shannon Robnett: I like to be involved with organizations that help people. I know that when we get done with our projects and we have leftover building materials, I love to get involved with Habitat for Humanity on that stuff. We also make sure that we make it a point to be involved with our communities as far as special programs that we can be helpful to kids in mentorship programs, because I know there’s a lot of kids that need mentors, and they are our future. So we’re always looking to partner with programs that allow us to bring what we know and bring that into a mentorship program with adolescents in our area.

Theo Hicks: And then lastly, what’s the best ever place to reach you?

Shannon Robnett: https://www.shannonrobnett.com/ is easiest thing for me to remember also. So if you just go there, all my links are there; you can find me on social media and all that other stuff, but https://www.shannonrobnett.com/ is where I hide.

Theo Hicks: Perfect. Shannon, thanks for joining us today and giving us your best ever advice on real estate, as well as more specifically on development. You started off by breaking it down into the two different types of deals you’ve done. The first is where you actually build a development for someone else, so you already know what they want; you to build it for them and you’ve got a buyer already.

And then what you focus on now, which is to build and then resell after stabilization using the syndication model. So you also mentioned the two types of investors – the one who invests growth and the other one who invest for cash flow. And you mentioned one of the reasons why you really like development is because you don’t need to rely on the forced appreciation, which relies on the assumption of rental growth in the future… Whereas your money is made by the difference between the cost to construct and the appraised value being about 20% to 30%. And that appraised value is based off of what rents actually are.

You mentioned that instead of actually selling once it’s built, you will stabilize the product first, get up to 90% occupancy, you’ll wait 90 days, so you exit that window of having 90 plus percent occupancy for 90 days in order for the end buyer to get optimum financing. You also mentioned that a lot of your investors use a self-directed IRA.

You talked about your reasoning behind having an in-house management company as opposed to a third party. First of all, because if you tried a third party and they didn’t do a very good job; then you ended up hiring someone you knew was really good. And because it’s in-house, you can focus more on the customer.

Your management company is not just a part of your business you kind of ignore, but it’s kind of the central portion of how you’re able to make money, because you like to charge $35 more than the competition, because you’ll get better residents who end up staying longer, as well as a greater value at the same cap rate. And you do this by making sure you hire the right people, have a warm and inviting personality that always follows up and just gives the resident a really good experience.

You also talked about the location and making sure it’s close to different amenities they want, as well as making sure you have the proper amenity mix at the actual property. You told us about your sales process, which is another reason why you like to stabilize, because you have a proven NOI, which allows you to get a proven sales price. You don’t have to worry about people coming in and saying, “Well, I think it should be this.” Like, “No, it’s this, because I’ve proven this to be the case.” And you contact brokers locally and nationally, and you said you’re usually under contract within two weeks, I believe you said.

And then your best advice was to make sure you are spending enough time doing your due diligence ahead of time. That way you’re prepared for when things ultimately don’t go according to plan.

So Shannon, thanks again for joining us. Best ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

Shannon Robnett: Thanks again.

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