Lessons in Denver Commercial Real Estate and Development

After being in the residential real estate business for three years, the market turned and I had to adapt to the market. I took advantage of the mortgage crisis and helped investors buy, remodel, and sell fix and flips. During this stage I guided my investors through 65 fix and flips. Some investors came and went. Others saw something in me and encouraged me to help them enter the Denver commercial real estate market. Some of those went away as well, but a core group has stayed with me as I moved full time into commercial real estate and development.

I started Canon Property Group in the Denver, Colorado commercial real estate market six years ago. Over the last three years I have generated $67 million in sales by myself and with the help of my investors, team of service providers, and my customers. I found that by listening to my investors and understanding the opportunities presented by the Denver market, I was able to grow my business. My philosophy is to demonstrate honesty, integrity, hard work, and results.

I did not, nor do not, spend time in the office cold calling potential clients. I am out in the street looking for them. This strategy has meant that I would generate deals of all types and all over the Denver metropolitan area.

It also meant that I had a lot to learn and that I had to learn it fast.

I would like to share with you some of the learning generated from my case studies.

My History

I have managed the development and sale of 83 townhomes and duplexes. I have sold a 12,500 square foot lot in Cherry Creek North and 40-acres of raw land in Frederick, Colorado for a 160-unit residential detached single-family development. I have sold a 50,000 square foot warehouse in RINO, found a mixed-use development site for a client in Old Town Littleton, and a Sloan’s Lake commercial property, among many others.

I have also had failures. In retrospect, they should not have been failures and if I had known then what I know now they would not have been.

You can learn from my mistakes.

Case Study: Development of a Duplex in LOHI.

A general contractor (GC) and I had been working with an investor in the fix & flip space. He decided he wanted to get into the development world and wanted to start small. I found a lot in Lower Highland (LoHi) zoned for a duplex. We bought the lot and began the design of the duplex. None of us had any experience in designing duplexes. Every morning at 5:00 AM the GC and I put pencil to paper and produced a design that we thought was appropriate for the rapidly changing neighborhood and our budget.

We got the plan approved, hired service providers, and got to work. One of the service providers was an interior designer. We put her into our truck and drove her around to view the competition. We provided her with our budget and told her to produce a design that was better than the competition, but within our budget.

She took weeks to produce her product. When she delivered her design, the GC began to price the materials she had selected. He quickly discovered that she had ignored the budget. When we confronted her with the numbers and asked her to adjust her design to put the numbers back in alignment she, replied, “I don’t get paid enough for this. I quit.”

We had not determined her fee. She did. All we asked was that she design the interiors to be within the budget. She ignored that essential element. Further, she refused to fix her error.

Takeaways:

  • When you are confronted with an opportunity don’t hesitate. Analyze it and decide, but understand that service providers need to be vetted.
  • I recommend speaking with five developers or construction companies to find service providers who will do what they agreed to do on time and on budget.

Case Study: Berkeley Townhome Project

I found a 6,250 square foot lot in the Berkeley neighborhood for an investor. At that time there had not been any new townhome development there. We were breaking new ground. As a result, there were no comps for sales prices, price per square foot (PSF), and the total square footage of the units. We did not have a clear idea of what the characteristics of the townhomes should be so that they best met customer needs.

We were developing blind, but we had a feeling that this neighborhood was going to boom. The commercial area on Tennyson Street had many new businesses opening in the converted bungalows. Street traffic was picking up. Restaurants were opening. We felt good about building six townhomes there.

We hired an architect to design cantilevered townhomes. We chose to do this because it was a way to maximize the square footage of each of the units. After all, we had the space, why not fill it up, right?

Wrong. The decision to maximize the square footage of the units rather than optimize the size so that we got the highest Price per Square Foot (PSF) was a mistake. The result was that the kitchen package was too expensive and we built square footage that didn’t generate a return.

Takeaways:

  • There is a point of diminishing returns where the unit size causes the PSF to decrease. Limit the units to the optimum size. Look at the sold comps in the neighborhood and try to optimize sf + psf while you build the characteristics the buyers want.

Case Study: Frederick, CO, 40-Acre Raw Land Deal, or a Raw Deal for Land.

I have a client who owns property in Denver, Frederick, and other sites in Colorado. He is a small businessman who, over the years, has accumulated over $10m in real estate assets. He is also very determined and knows what he wants.

In discussions one-day, he advised me that he had an approved plat for a 40-acre residential development site in Frederick, Colorado. He said to me, “I want $1m for the property. Sell it.”

Sometimes owners of assets don’t understand the total value of the property they hold, especially with regard to mineral rights. This was our case.

I listed the property and visited the site with potential buyers. One of these was a very experienced developer who said the property was worth only $700,000 and told me the approved plan that my client possessed had expired and the development plan would have to go through the approval process once again. I knew then that I had to find $300,000 in additional revenue for the plot, broach the subject with my client, and understand the subdivision plat approval process, or the deal would not close.

My client was receiving $75 per month from an oil company that had oil production on adjacent plots. I called another client with whom I had done several deals and asked him how to discover if the mineral rights of this property had any value. He agreed to help me. He researched the Colorado oil maps and discovered that the site had more income potential than my client had been receiving.

The buyer negotiated with the municipality to get his development project approved. However, he did not want to deal with the sale of the mineral rights. He wanted the land for $700,000. I then began looking for a purchaser of the mineral rights. Through my network, I found a buyer who agreed to pay $200,000 for the mineral rights and we were able to conduct simultaneous closings for the property and the mineral rights.

Takeaways: 

  • The seller’s ability to give information is critical. If he does not know the details of the value of his property the sales transaction will be less than optimal.
  • Your network of contacts can prove to be of great value. Treat it as such. Maintain contact. Provide them with value and when time comes to call on them their reaction will be positive.

Case Study: Sunnyside Townhome Project

We put together a group of investors for the development of six townhomes on a 6,250sf lot in the Sunnyside neighborhood. The investor group wanted to hire an experienced commercial builder who had built many office buildings.

The construction of the project was well-organized, timely, and very professional. They were very good to work with. However, we did encounter a problem with the storm drainage system because the architect failed to design adequate infrastructure for the back-up generator for the pump.

Once that was overcome, we discovered that the GC’s idea of appropriate finishes for a townhome project is different from ours and our target buyer segment. His budgeted numbers looked good, but when we reviewed the finishes we had to start over. This failure on our part to perform a detailed review of the finishes prior to approval of the final budget caused delays and added costs.

Takeaways:

  • Don’t hire a sophisticated commercial builder for a townhome project. For example, the finish level of commercial projects might be different than those required for a townhome project which require higher quality. That difference will impact the budget and the final psf.
  • Be certain to know exactly what they will include in their budget and the cost. There are hardwood floors and then there are appropriate hardwood floors.
  • As far as architects go, they needed to be monitored at every step. Question why they propose what they propose. The GC must review their designs in process and the final product with them.

Case Study: Gemini: a 1031 Exchange and Potential Timing Pitfalls

With recent changes to the Denver zoning code, the City Council, in its own inimitable way, has had a negative impact on some property values, limited development options for a City in need of more housing, and driven up the cost for projects that are approved. Its new requirements for “slot homes” is incomprehensible. Once again, the law of “Unintended Consequences” rules.

But this case study is not about that unfortunate event. Instead, I would like to continue with the theme of the management of service providers, especially architects and the City inspectors.

We had a 14-unit, “slot home” project in Jefferson Park. It is called “Gemini.”

Our investor group built the project and negotiated a contract with a buyer who was planning on doing a 1031 Exchange with a property he had in Glendale. 1031 Exchanges are time-bound. That is, the transactions must be completed with certain timeframes so that they are eligible for Federal income tax benefit.

After our learning on the Sunnyside project we knew we had to pay close attention to the architect’s work and we did. However, who would have anticipated that the architect’s design of the windows and staircases would be incorrect? A couple of simple calculations were done incorrectly and had to be adjusted on site by the GC. The architects were “too busy to pay attention to that level of detail”

In addition, the Gemini project had a “residential fire suppression system,” and not commercial.
This type of system falls under the regulatory authority of the Colorado Board of Plumbers and our Fire Suppression System Inspector was licensed and followed our project from plan review to final construction. After months of following our project and making suggestions, at the time of the Certificate of Occupancy (CO) Review, he required the installation of more sprinkler heads and insulation in the back two units which caused a one-month delay.

Meanwhile, our 1031-bound purchaser had to renegotiate his purchase contract with our investor group in order to comply with the 1031 eligibility requirements. This resulted in many tense meetings with significant tax implications hanging in the balance.

Takeaways:

  • Hammer architects. Don’t hire architects who cannot handle the project work requirements.
  • When dealing with inspectors, document everything they say. Double check their decisions to ensure that at the CO there are no surprises.

Case Study: LoHi Townhome Project

LoHi is one of the hottest development sites in Denver. It is located on the northwest side of I-25 and a short walk to LoDo and downtown Denver. It has many new apartment, condo, and townhome projects and is attracting a younger, more affluent buyer who work in the surrounding area.

Our project was a 12-unit townhome development with one, two, and three-bedroom units. We knew that the units had to be appropriate for the target buyer segment so some design details were more complex and expensive. We wanted to create a project that stood out from the rest.

However, the investor group wanted to maximize the number of units on the site. This required some design compromises that, in retrospect, we should have avoided. For example, in order to squeeze in more units, the design left the units narrower than ideal. This compromised the closet space, bedroom size, and the garage. We used built-ins to compensate for the lack of adequate closet space and included a one-car garage.

To create an open feeling with lots of light, we built floor to ceiling, wall-to-wall windows. This option required the use of steel “moment frames” from the foundation to the rooftop. We included full glass walls that opened and closed like accordions doors. We had five different unit types in a 12-unit project. This increased the cost of the foundations since they were all different for the five different designs.

We included open trusses to allow for the HVAC duct work to pass through the trusses. However, the architect (another one) made a calculation error and we had to build soffits instead of running the ductwork through the trusses.

In spite of all these problems, the investors received a 100% return on their out-of-pocket investment.

• Trust your real estate broker who knows what the design expectations are in the neighborhood for the target segment. Smart guys who are in the investor group might not know as much as the broker. The one-car garages sold but were not ideal. We should have sacrificed some units, minimized the different designs, and included two-car garages. One parking space per unit works for condos, but not top dollar townhomes in hot neighborhoods.
• Be careful with “over-building.” Some ideas might appear to be dramatic and appealing to buyers, but if they don’t bring real value to the buyers save your money and build less.

Takeaways:

  • Trust your real estate broker who knows what the design expectations are in the neighborhood for the target segment. Smart guys who are in the investor group might not know as much as the broker. The one-car garages sold but were not ideal. We should have sacrificed some units, minimized the different designs, and included two-car garages. One parking space per unit works for condos, but not top dollar townhomes in hot neighborhoods.
  • Be careful with “over-building.” Some ideas might appear to be dramatic and appealing to buyers, but if they don’t bring real value to the buyers save your money and build less.

Case Study: 29 Tenn

Every real estate asset owner or investor has to be prepared to deal with the regulatory authorities. The city can “downzone” your property, giving the owner fewer uses and consequently less value. The zoning board can be recalcitrant and refuse to give you a requested rezoning or additional use—even if the decision would make perfect sense. In addition, the city can take your property and convert it to a property with “community” benefits due to some architectural or historic significance. The various offices in the municipal government can delay the approvals that your project needs to move forward – either due to workloads, incompetence, or “just because they can,” although this last scenario does not happen often.

And it is not just one office or one authority that can cause headaches. It can be many: traffic, water and sewer, zoning, engineering, or the many various building inspectors.

As the development draws closer to the date of the certificate of occupancy (CO) approval, the impact of the “no-go” decisions becomes greater and greater. If it is a townhome development with purchasers, their “move-in” dates can become delayed, and in many cases, no exact move-in dates may be given.

Imagine that you have 12 families ready to move in on the same day and the Denver Department of Wastewater Management inspector arrives and says, “I do not like the type of drain tile you installed in the driveway. Take it out and replace it with this type.”

Denver Wastewater changed its mind at the final inspection (storm drainage). The inspector insisted upon two inches of elevation change of the driveway, although he had approved the installation when it was done. This meant that the entire driveway had to be torn out and replaced. The drain tiles were not available in Colorado. I had to fly to Phoenix, rent a truck, buy 8,000 pounds of concrete tiles, and drive back to Denver overnight so that the families could move in on the date promised.

Takeaways:

Include money and time contingencies in your budget. Do not be surprised if a city inspector changes his mind at the last minute.

Case Study: West Colfax Business Improvement District

Have you ever driven west on West Colfax Avenue from Federal Boulevard to Sheridan Street and counted the number of used car lots? Eight are present. Have you ever looked at the types of retail shops there? You’ll see bathhouses, tattoo parlors, low-end restaurants, and fast food outlets—the makings of the type of retail neighborhood common in the 1970s.

Would you build apartments, condos, or townhomes there? We decided to do just that.

When the closure of St. Anthony’s Hospital was announced and its grounds were put up for sale, I knew change was coming. I immediately approached my investor groups to gauge their interest in pursuing a project near there, and one of them saw what I saw. I then went in search of a property and found d purchased several parcels that totaled 18,750-square-foot.

I knew that Colfax Avenue could not remain the same. The City and County of Denver had created the West Colfax Business Improvement District (WCBID), and the federal government had made it an “Opportunity Zone (OZ),” with all of the benefits that come with that designation. Three light rail stops exist within a mile, and Sloan’s Lake is two blocks away.

We knew where to buy land and what price to pay. Seems obvious, right? Then why has development not accelerated at the pace it did in LOHI? Our project is located on the south side of Colfax. Our project is at the right price point in a neighborhood where prices are going to increase—and rapidly.

Takeaways:

  • Understand the neighborhoods and the changes that are being driven. Get to know the geographical limits of that neighborhood and where the economic drivers might weaken.
  • Perhaps most importantly, our investor’s risk tolerance was perfect for the deal. He understood the pluses and minuses in great detail and was very comfortable with his decision. You should too.
  • If you or your investor partner has a queasy stomach, keep looking.
  • As you build these projects, incorporate the information you have learned into the designs. We have learned after dealing with almost 90 townhome units that no one wants to put a hot tub on a rooftop deck. Don’t waste the money to handle it. Second, we used to offer multiple variations for the interior décor. This just adds cost and supplier and construction complications, and it often brings delays, as purchasers delay their decisions.

That’s it for now. In the very near future I will continue with my blog posts. There is lots of learning to benefit from. Don’t make my mistakes. If you want to discuss them and how to avoid them for your project, give me a call. I’m available for coffee.

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