GI278: Ground Up Development Investing with Andrew Brewer

GI278: Ground Up Development Investing with Andrew Brewer

Andrew Brewer is a commercial real estate operator and developer who founded his investment firm in 2017. Since then, he has served as the lead sponsor and developer on multiple ground-up development projects and land subdivision projects comprised of hundreds of residential units collectively valued at over $160 million.

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Transcript:

Charles Carillo:
Welcome to another episode of the Global Investors Podcast; I’m your host, Charles Carillo. Today, we have Andrew Brewer. He is a commercial real estate operator and developer who founded his investment firm in 2017. Since then, he has served as the lead sponsor and developer on multiple ground-up development projects and land subdivision projects comprised of hundreds of residential units collectively valued at over $160 million. Thank you so much for being on the show!

Andrew:
Thanks so much for having me.

Charles Carillo (00:25):
So, can you give us a little background? ’cause Everybody has a different background before getting into real estate, but yours is pretty unique. You were in a couple different parts of being an employee then in some other ones that were kind of complimentary to what you do now. So can you give us a breakdown of yourself, both personally and professionally prior to getting in investing in real estate?

Andrew Brewer (00:43):
Yeah. So you know, my first job is I, in high school I started working at a, a butcher shop. And so I became a butcher and I did that through high school and college. So for eight years that was my job. And then after college I got a job as a stationary engineer. And no, that’s not engineering new kinds of paper. It’s actually stationary in the sense that like it, you know, you’re not moving, right? It’s a stationary object and that is an opposition to what they call marine engineering which is maintaining large boats essentially. So that could be military vessels or freighters or things like that. So a station, a stationary engineer does the same thing a marine engineer does, but in a stationary facility. So that would be a large building.

Andrew Brewer (01:36):
So think, you know, high rises hospitals, things of that nature. So I did that for about four years. And stationary engineering is really, it’s kinda like a combination of building maintenance and asset management. You know, you’re managing all of the major mechanical systems within a large building. And these large buildings, if it’s a high rise or something, typically have different systems than your basic residential building. So you know, you’ll, you’ll have you know, like a generator that can power the entire building that you have to maintain. You’ll have maybe a, a chiller or a cooling tower. ’cause If you look at generally like a, an apartment building, you’ll see a whole bunch of condensing units outside around the building. ’cause Each unit has their own condenser. In a very large building where you don’t have a lot of roof space or anything, you have to have one central building system.

Andrew Brewer (02:33):
And that would generally be on the roof, but it’s like a massive system. So it’s dealing with a lot of that kind of stuff. And then managing all the different vendors that come in, you know, plumbers electricians, you know, diesel mechanics, things of that nature. So so I did that for about four years and that was very complimentary to what I’m doing now. At the same time I was working in that job, I was investing in real estate on the side, just myself small single families, small multifamilies. I was working in California, so I started investing out of state because I couldn’t afford to buy in California. So I was building a portfolio in Kansas City at the same time. And Ghana got to a point with my job where, you know, some projects were wrapping up. And there was kind of a natural exit point for me. So I decided to take what I had learned from investing in real estate with my own money by myself, and then also the skills that I had learned from my W2 position and just put those together and start my real estate development company. So that’s kind of how I, I got into real estate there. Why

Charles Carillo (03:41):
Did you choose real estate as an investment vehicle? Even when you were working and you were investing into single family rentals,

Andrew Brewer (03:47):
I, I like the fact that there’s income that can be generated from investing in real estate. So, you know, for some people, if you’re investing passively, you know, like there’s, you know, potentially cash flow, whether that’s investing, you know, a chunk of money into like a real estate syndication or a REIT or something like that, or whether it’s, you know, just buying a property by yourself like a house and renting it out. There’s an income component that isn’t dipping into, you know, the equity that you own. And I like that in opposition to things like stocks where there are some dividend stocks. But for the most part, you know, your money is made through the appreciation of the stocks. And if you’re cashing out, you know, something to live on, you’re generally eating away at your principle. You know, there’s like the 4% rule, I think with stocks where you, you know, liquidate 4% per year.

Andrew Brewer (04:41):
But if the market is appreciating at, you know, seven or 8% per year, then you’re not really losing your principle. But but there’s very little of actual like cash flow or things you could live off. I also like the fact and that there can be an active and a passive component in real estate. So with stocks, you know, I mean, you own some part of a company, but, but you’re not involved in the day-to-day, you’re not managing stuff. You don’t really have the ability to just get a salary also from your ownership in the stocks, you know, unless you go and apply to work at that company. And in that case, you just have a job there. They’re not saying, we’re gonna give you a job because you’re a shareholder. They’re just saying you just have a job. And what I’m able to do in real estate is, you know, I can invest passively into some deals or I can buy more passive investments, or I could take a more active role.

Andrew Brewer (05:36):
And I have the experience to be able to take an active role. And that’s a lot of what I do now. I, I have some passive investments, but I do enjoy the active aspect of it. So my development deals that I do, you know, I’m the developer in those, I’m generally the lead sponsor in those deals. So I also have the ability to be active, to have more control over the deals. And I, and I like that there’s just a lot of flexibility. There’s a lot of different ways to do it. You know, so that, that’s been the appeal for me.

Charles Carillo (06:04):
Yeah, that makes perfect sense. The the passive and the active side of it makes sense. And I, I think it’s great where if you’re not a professional or really experienced in an area to be active, you can put your money and get exposure to it in the passive realm. For instance, I’m not a developer, so I would put my money with a developer on a passive side. Whereas I would do something a little bit more active where it comes to what we really focus on, which is like value add different you know, type properties. One thing when I was preparing for this episode mentioned in your background that you were involved with construction defect litigation. Can you explain a little bit about that and maybe some lessons that you learned from doing that, that you’ve brought into what you’re doing now? Yeah,

Andrew Brewer (06:48):
So construction defect litigation is essentially lawsuits against builders and developers who develop and construct properties, but do so very poorly. So you know, the same as like if you go to a store and you buy some products that you know, should last for a while, the company will generally give you a warranty for like a year or something. You know, builders and developers are not giving out a warranty necessarily, but there are generally accepted timelines for, you know, how long things should last. So, you know, you may not have a you know, a warranty on the pipes in your house. But you know, I think everybody would probably agree that, you know, if you’re getting a lot of leaks in your walls within a couple years of your house being built, that that’s, you know, something’s probably wrong there or something was done incorrectly in construction.

Andrew Brewer (07:51):
That’s leading to what most people would agree is a premature failure. So there’s generally a, a 10 year window to bring a construction defect lawsuit against a builder. It has to be proven that it is in fact construction defect. And it’s not just you know, some issue with the materials or something you know, ’cause it could be like, Hey, you know, you just got a, a faulty batch of pipes and the plumber had no idea and it’s not really their fault. But you could also say like, okay, well did the plumbers, you know, ream the pipes out? Did they install ’em correctly? So it’s an, it’s a large process that you go through to determine whether it is construction defect or not. Generally what’ll happen is there’s law firms that target construction defect lawsuits. So the group that we worked with was based out of Los Angeles.

Andrew Brewer (08:45):
They were one of, I think, the leading firms for construction defect nationwide. And what they really do is they go around to different buildings and just kind of ask questions. You know, they’re like, Hey, you know, how is your maintenance? Like, do you feel like you’re having a lot of repairs? And they’ll kind of look into it and see if they can identify a pattern with the repair logs and say like, oh, you know, you guys are having to do, you know, a lot more plumbing repairs than would otherwise be necessary. Or, oh, like, really your elevator failed, you know, after three years and you had to replace it. That seems very strange. Or, you know, you’re having issues with, you know, your electrical systems or whatever it is. And they’ll look for those patterns. And if they feel like there’s a potential for a case, they’ll generally approach the building owner whether that’s an individual or an HOA or, you know, whoever the, the owner or owner group is.

Andrew Brewer (09:43):
And they’ll basically say, look, we’ve reviewed all of your records. We believe that there may be a case for construction defect litigation. We would like the opportunity to represent you in that they generally do it on commission. So they’ll front all of the costs for the litigation. Like they’ll pay for all the experts, they’ll pay for the tests, they may even pay for repairs in the meantime. You know, in between when the contract is signed and when the case is won. And then they’ll take, you know, they’ll get a reimbursement for all of the fees that they paid up front, and they’ll generally take, you know, 30 to 40% of the proceeds of the lawsuit as their payout. So it’s very attractive for buildings to do that because if there’s not a case and they lose, like the building doesn’t care, you know, they’ve probably gotten a lot of repairs done on the law firm’s dime over the two, three or four years that it would take you the lawsuit.

Andrew Brewer (10:44):
It didn’t cost ’em anything out of pocket, like they only have upside. So that’s generally how that works. And then the law firm brings in their own experts. They will spend two to three years building a case documenting everything, testing things and then they’ll generally go to you know, they’ll file a lawsuit. Oftentimes the developer or the builder will have some kind of insurance, so they’re basically settling through insurance. But that’s, that’s kind of how, how it is. And so for me I was hired as a stationary engineer because the facility I was working with was gearing up to file a lawsuit and they needed more help. They, you know, ’cause there’s a lot of additional work that the engineering team or the facilities maintenance team has to do in order to work with the law firm.

Andrew Brewer (11:37):
So you need more staff. So I was hired at the very beginning of that once they knew that like, hey, there is a, there is gonna be a case here. And so I, I worked at that facility for about four years two to three years of that was building a case the last year was bringing that case. And then once the case was settled and the payout came, the proceeds were used to do reconstruction on the building to fix all of those problems because that’s why we got the payout, you know, they give you the payout so you can fix all the problems. So for us, that included you know, redoing all of the window seals redoing a lot of the roofing full re-pipe of the entire building. You know, a lot of, a lot of stuff like that.

Andrew Brewer (12:23):
So that’s kind of it in a nutshell. But learned learned a lot from it, you know, as you can probably imagine, there’s a lot of ways that contractors can cut corners. And, and that’s really part of the reason why I then went into development. You know, having seen all of the problems that can come up, you know, down the line from faulting construction. You know, I look at buying a value add building now and I’m kind of like, Ooh, I like, I don’t know what’s in the walls here. You know, I don’t know if they installed this stuff correctly. Whereas if I am developing a property, I can go look at it and, you know, I can see the walls while they’re still open before they sheet rock it up and I can look at it and say, nah, you didn’t do that correctly. You need to rip that out and redo it. ’cause I’m not about to get hit with the lawsuit nine and a half years down the line because you didn’t install stuff

Charles Carillo (13:13):
Correctly. Interesting. Yeah, that’s that’s quite the unique kind of experience that you have there to bring to what you’re doing now. So for, for right now, like, what are you doing, what’s your overview of your company now? What’s your current investment strategy and criteria? What, what is your company working on?

Andrew Brewer (13:29):
So right now we we do development deals. So mostly focused on residential type assets. So we’re developing a couple of single family home subdivisions. We’re developing an apartment community, a couple town home communities manufactured home park. And our, while we’re expanding an RV park, we didn’t develop it from scratch, but we’re doubling the size of it. So you know, all and all of those have to do with some kind of residential housing. So that’s kind of where we focus right now. You know, the market’s in a bit of a weird spot. So we’ve been very selective with projects lately. We haven’t started many new projects recently. Just not wanting to get overexposed when everybody’s a little bit shaky on development. But we’re continuing to work with the projects that we already have.

Andrew Brewer (14:27):
And that’s moving along. We also buy RV parks and mobile home parks just to, to hold those and operate those as assets with development. You know, depending on how you structure the deal, there’s generally not a lot of cash flow even for the developer. And the way I do a lot of my deals, I don’t take incremental development fees upfront. I generally take my compensation on the backend as a percentage of the profit split. So I’m paid based on performance. You know, if I do a good job and, and the projects work out the way I think that they will, I get compensated very well. But if not, then, you know, I’m making sure that the debt, the investors any preferred returns are getting paid back first before I’m taking really any money out of the deal.

Andrew Brewer (15:19):
So, you know, I, I try to make sure that I’m putting my money where my mouth is <laugh> and not just saying like, oh, I’m gonna, you know, it’s take some multi hundred thousand dollars development fee regardless of whether I do my job well or not. So, you know, right now we, I, you know, I still like development but want to be very selective in the deals that we’re taking on. So that’s what we’re doing. We’re continuing to work on the deals we have and we’re, you know, buying manufacture home and RV parks in the meantime also ’cause we see some opportunity there.

Charles Carillo (15:50):
Yeah, that’s great. Yeah, the alignment of interest is one of the most important things and the GP LP type relationship that I have found over the years. And so it’s great that you’re, that you kind of see that as well. For people that really haven’t get involved with ground up development for, can you kind of break down the different steps and phases involved in a ground up development process?

Andrew Brewer (16:13):
Yeah, so with ground up development, it’s gonna vary a little bit based on the municipality that you’re in or the asset type that you’re working with. But for the most part you know, you, you have land, it generally starts off as what they would term raw land, which means that there’s nothing on it and it’s not really zoned for anything. It’s generally raw land would be land that is not in a city or you know, it’s agricultural land generally. So it’s being used to, you know, graze cattle or grow crops or something like that. And at least here in Texas, agriculturally zoned land typically has a tax exemption on top of it. Because agricultural use is not doesn’t generally produce a lot of money. So that would be like very, very basic. So you know, you find a piece of land if it’s at the very beginning it would be raw land.

Andrew Brewer (17:10):
And then from there you would go in and try to get that land zoned to, you know, whatever it is that you’re trying to build. So the, the city or municipality, or if it’s a city, there will be some kind of zoning that you have to adhere to. If you’re not in a city, generally there’s not any zoning. If you’re just in a county, you can generally do what you like as long as you adhere to building codes and everything. But most of the development that you’re gonna do, unless you’re just doing houses or something, is probably gonna be in a city. And there’ll be different zoning districts. You know, there will be residential zoning, commercial zoning, industrial zoning, multifamily zoning or some kind of mixed use zoning where, you know, they could potentially approve you know, some kind of commercial or maybe some kind of transition transitionary residential, something like town homes or something.

Andrew Brewer (18:08):
And then the zoning codes that you have that’ll kind of outline how many units you can put per acre, what kind of products you can put things like that. So you’ll get your zoning. Once you have your zoning, then you do generally a preliminary plat. So you have to plat your property and the plat is the document that you get approved through the city that says, you know, this is now what I’m going to build and this is what my property will look like. You know, I’ll have, you know, streets over here, I’ll have this many units they’re gonna be on this part of the property, I’m gonna have my detention pond or, you know, whatever it is over here, I’m gonna have my clubhouse over here. You know, the plat shows, you know, well where all the buildings are gonna go, how big those, how big of the footprint of those buildings are gonna be, where the roads are gonna be, where the utilities are gonna be, like that kind of stuff.

Andrew Brewer (19:05):
So you’ll get your preliminary plat approved generally from there you’ll get your civil construction documents and that’ll be like the exact specifics of what’s going to go where and how it’s going to be constructed, you know, so it’ll be like, I’m gonna, I’m gonna run the utilities through the middle of the street. It’s gonna be in a 24 inch trench. It’s gonna be, you know, six inch pipe, it’s gonna connect to the city line over here. You know, like all those really specific details are gonna be in your civil construction plans, you know, get those approved. And once your preliminary plat and your construction plans and your zoning and all of that is done, you’ll generally get your final plat approved through the city. And once you have that, you can start constructing at least the, the infrastructure as they call it on the projects.

Andrew Brewer (19:54):
So that’s like roads and utilities and things like that. And then quite separately you have your building plans. And the building plans are just, you know, it’s like a house, right? It’s your architectural drawings, your mechanical, electrical and plumbing, your structural, all of that goes together in one plan set and you submit that to the city separately and get those approvals. And once those are approved, then you can actually build those buildings on site. And once you’re done with that, you get your CEO or your certificate of occupancy and then you can either sell the buildings or rent them or whatever you’re gonna do. And that’s, you know, kind of a, a little five minute breakdown of generally the process. It’s a little bit different depending on the asset class or where you’re at, but for the most part, those are the steps that you take.

Charles Carillo (20:41):
Yeah. Andrew, that’s a lot of great information. Thank you so much for breaking it down there. One question I have obviously is like, you have a specialty in looking at vacant land and figuring out kind of what its highest and best use are. And I have a, I have I have a partner who’s a single family developer and he’ll show me a piece of land and you know, I see one thing and he’s telling me just how you’re breaking it down, you know this is where the road’s gonna go, this is how many, you know, property, you know, how many townhouses they’re putting up here, everything like this. So when you’re looking at a vacant piece of land, I mean, how do you, without going through you know, extensive underwriting, I guess, I mean, how do you put a, a value on it and seeing kind of like how I can find, you know, maximize it for highest and best use for myself, my investors, and also, I mean, you’re, you’re pretty much getting in partnership really with the community in some sense because you want something to, you know, help the communities so everything gets signed off, but also, so, I mean, it’s a benefit too.

Charles Carillo (21:33):
So it’s, there’s a lot of moving parts there, you know what I mean?

Andrew Brewer (21:35):
Yeah. some of the biggest factors, you know, for me are, there’s some, some very basic characteristics of the land itself that you wanna look at. Things like, is it in a floodplain? Is there some endangered species that lives on the land? You know, things like that which will kind of automatically restrict you in some ways. There’s other, you know, there’s, I, I would put those kinds of things in one category. Another category of things to look at are what are the actual physical characteristics of the land? So is it very hilly? Like, you know, like a lot of topography changes or elevation changes. I mean that’s, it’s far more expensive to develop land that’s like on a hill, right? You know, you have to do a lot more structural engineering. At least here in Texas, trees are a big thing.

Andrew Brewer (22:30):
So do you have any very large trees? You know, because some municipalities will not let you cut down what they term to be heritage trees or trees over a certain size. So you gotta look at, at things like that. You know, are there, you know, is there a lot of rock in that area? You know, if, if the entire property, you know, has limestone for instance, that’s like, you know, a foot below the surface, but then you have to, you know, sink your utilities three feet below the surface. I mean, you’re gonna have to go in there with dynamite and blast out a whole bunch of rock, which is very, very expensive. And we have, you know, properties that are just completely limestone in the Texas Hill country. So there’s those physical characteristics you have to look at. Also, you also have to look at the presence of utilities.

Andrew Brewer (23:20):
You know, do you have access to water? Do you have access to sewer? Do you have access to electric? And not only looking at are those utilities running near your property, but are you allowed to tap into them because there may be a waterline on the road outside your property, but if that’s a city waterline and your property hasn’t been annexed into the city, well you can’t access that water unless you annex into the city and the city might not let you annex. Or if they do let you annex, they might put a bunch of restrictions on you that’ll kill your project. So you also have to look at presence of utilities. Presence of utilities in my experience, is the number one predictor of value. Like if you have access to water and sewer and electric, your property is gonna be worth like 10 times what it is if you don’t have access to any of that.

Andrew Brewer (24:09):
So that’s another key thing. The other thing that you have to look at is what does like what does the city want you to do there? ’cause Every city is gonna have a future land use plan. Let’s plan 20 to 30 years out in the future. And they’re gonna say, well, on this property that you’re looking at, we want you to put this type of thing. Like, we want you to put houses here, or we want you to put a commercial building here, or we want you to keep this as agricultural land. And I don’t go to war with the city. I always just kind of do what they want. So if I’m saying like, Hey, I’m, I’m a town home developer, I wanna build town homes here, but I go look at the city’s future land use plan, and they say, well, we envision this area being an industrial part of town, and we want warehouses there, I’m gonna say, oh, well I’m not gonna do that then because the chances are slim to none, that I’m gonna get the city to change their mind and approve my town homes.

Andrew Brewer (25:08):
So there’s all of those kinds of things that you wanna look at to make sure that the project is gonna be viable. And that’s a, like you said before even doing any underwriting to see if you can actually, you know, to if what you wanted to do and everything worked out and the city liked it and you had utilities and everything, I mean, you still don’t know if it’s gonna be, you know, viable from a cost perspective. Can I afford to, or, you know, can I basically, can I afford to sell or rent these property or, you know, these buildings for the cost that’s gonna take me to build them? ’cause Some markets are cheaper to construct in than others. Some, you know, have more, you know, are are have a higher end value depending on where you’re at. But you know, you’re getting into the, the underwriting when you start looking at that kind of stuff. But yeah, I mean there’s a lot that goes into it. Like for me, it’s kind of second nature now, but for a lot of people, you know, it’s probably quite an exercise in trying to, you know, remember all of the things to look at.

Charles Carillo (26:09):
Yeah, no, no, it’s definitely just you know, figuring out if a property underwriting a potential vacant lot is I mean a whole different, a whole thing from let alone building it to, you know what I mean? But let’s talk about for some passive investors that might be interested in investing into a development deal. What are some like key factors that they should know before investing in the ground development that you would say if you were on the passive investing side into someone else’s deal?

Andrew Brewer (26:38):
The number one thing that I would look at is the viability of the project and how much how much work has been done to make sure that the project is viable and how much risk has been taken out of the deal. So I see a lot of people pitching development deals where, you know, really they haven’t done much beyond found a piece of land that they think is a good price. But development deals can go wrong for so many different reasons. And, you know, they could not be approved for, for any number of things. And, you know, so I, I like to see a backup plan, but I also want to know that the developer has at least gone to the city, talked to somebody, got an idea for, you know, what’s going on in the area and whether the thing that they want to build is gonna be appropriate for that area and whether the city wants to see it or not.

Andrew Brewer (27:39):
Because, you know, like I, I’ll give a couple examples. I saw a project in I think it was in Florida that somebody was pitching and, you know, they had, like, they had found this piece of land and they had said, invest all of this money. We found this piece of land, this is what it’s gonna cost. And, you know, if we achieve what we want, you know, you’re gonna get a, whatever, you know, 500 x on your money, it’s gonna be all great. But if we can’t achieve that, it’s gonna be like a, you know, a 200 x or whatever, we’re gonna do this other project type, and if we can’t do that, we’re gonna do this other project type. And it was basically like the best case scenario was they were gonna be able to like build a skyscraper and you would like, you know, and, and, and investing in this project would be like investing in Amazon in 1996, and it was just gonna be the greatest thing in the world, but if it didn’t work out, then you were basically just gonna lose all of your money.

Andrew Brewer (28:37):
And I’m looking at it and I’m kind of like, you haven’t talked to the city or anybody about this at all. Like, you just, you know, made up a bunch of stuff and you said, well, I could build a skyscraper on it. And it’s like, but probably that’s not gonna happen <laugh>. You know, so what is the most realistic thing that you’re probably gonna do here and underwrite to that? Whenever I do my deals, I, you know, I, I develop the entire business plan and I run it by the city and, you know, and, and even if I run it by the city, there’s not a guarantee that they’re gonna approve it or at least wanna know that they’re aware of what I’m doing. And they’re not just saying like, Nope, no way. You know, I, I try to get some kind of like, Hey, if I did this, if I built this many units of this product type, is that something that, you know, the city would like to see in this area that you could see yourself, you know, putting your stamp of approval on?

Andrew Brewer (29:30):
And if they’re like, yeah, you know, if it was well designed and, you know, it took these things into consideration, we’d do it. I’m like, alright, that’s been fairly de-risked now. Or I’ve seen, you know, another project I saw was somebody, you know, they had bought this vacant lot and they were like, I’m gonna build a six story, you know, mixed use, you know, building. And I looked at where it was, I think this was in Georgia, and I’m like, this is a vacant lot in the middle of a residential neighborhood, most of the houses of which were built in the sixties. And it’s kind of, you know, a little, little dumpy, a little rundown. It wasn’t like a complete ghetto, but it wasn’t like a nice neighborhood. And I’m like, well, that’s just not gonna fit in this neighborhood. You’re gonna have all these single family homes and then like some six story building like outta the middle of nowhere.

Andrew Brewer (30:24):
Like, it, it just doesn’t fit. I don’t realistically see it being approved. I don’t realistically see anyone else coming in to build this because I mean, who’s gonna rent there? You know, or who’s gonna buy this? Exactly. So I just, that’s the number one thing for me is project viability. Also the sponsor’s experience, you know, you at least want somebody on the team that knows what they’re doing and you want somebody that’s local also, because that’s another thing that I’ve seen people kind, especially people from California, and I’m originally from California and I moved to Texas, but I’ve seen other Californians that have moved to places in Texas with a lot of money burning a hole in their pocket, and they go and buy some piece of land and like walk into the city meetings thinking, well, I’m some hot shot. I got all this money, I’m gonna develop this thing.

Andrew Brewer (31:15):
And the people at the city are just straight up like, no, we don’t like you. You’re not from around here and we don’t like your attitude, so we’re just not gonna approve your project no matter what you do. And they just like completely lose their shirts on it. So I wanna see somebody that’s local to the market, you know, they don’t have to necessarily know exactly what they’re doing but they need to be the person going to the meetings where they can say, Hey, I’m a part of this community. I live here, or I’ve lived here, you know, maybe I have a business here, or I have some investment in this community. People with the city and the planning department are gonna be so much more likely to talk to that person or approve that project if they feel like the developer has some kind of interest vested in the community beyond lining their own pockets.

Andrew Brewer (32:04):
So active presence in the market, somebody that knows what they’re doing could be the same person, could be two different people. Those are the two key things I look for on the development team. And then project viability and also making sure the project is well capitalized. That’s the other thing. Those would be like the three things because you know, markets change, right? You know, things go up, things go down. It’s a tough market out there for development right now, and if you’re not prepared to, to hold your project maybe a little bit longer, you could lose all your money or all your investors’ money. So just making sure that that you have not undercapitalized the deal, that there are some reserves, there’s some interest reserves. You’ve got the ability to extend your loan or maybe to refinance. You know, there’s not just a, there’s not just like, Hey, if I don’t get it done exactly on the timeline, that’s on the o everyone loses their money. Like that’s not a good position to be in. You want to be able to say, this is our projection. We think we’re gonna get it done in this timeline. If for some reason we need to hold the property another year or two, we have the ability to do that, or we have a plan that will allow us to do that. So those would be my top three for passive investors.

Charles Carillo (33:17):
Yeah, that’s a lot of great information. One thing you said about working with sponsors that have local knowledge, that’s one thing when looking at a deal passively or even if you’re gonna get involved as a cog in something, or if I was looking for property managers when you’re speaking to them and when they start throwing around that, ’cause everybody does their underwriting, like you said, like the, the people in Florida with the skyscraper, they do some sort of underwriting, right? But when people who have like done their research and they’re like, oh, we’ve gone to town hall, we’ve gone to these meetings, we’ve spoken to people on zone, you know, all this, all this in depth. I would say more in depth than usual due diligence is this is where it’s like where stuff starts lining up because these people know it intimately inside and out.

Charles Carillo (33:58):
Or I’m a property manager in just this one town and these like four zip codes and this is what I’ve been doing for 20 years. Another thing like, you know, local, they specialize in one thing, it’s worked for them for many years and they have all the connections that go with it and all the contacts and yeah, that’s a lot of great information that people can use I think when inve investing in development deals. And I think in kind of any type of real estate deal if they’re active or passive when working with other people.

Andrew Brewer (34:22):
Yeah, yeah, definitely local knowledge, no matter what is very, very important.

Charles Carillo (34:28):
As we’re kinda wrapping up here some of the, when I’ve looked at development deals and I’ve passively invested in some before how does, I mean, how does that kind of the compensation, is it much different than a typical value add? I know this is really deal specific, but you guys are obviously putting a lot more time into these deals. There’s a lot more risk, you’re putting a lot more in the line. It’s much different than if you’re buying an apartment complex, you know, a hundred units, it’s 90% occupied. We’re, you know, we’re going down to 80% occupied and we’re doing two units a month renovating, or three units a month. A lot less risk there. Once you have the contractors in place, there’s not that, you know, not as much time intensive, right. With you, I mean, you went through the whole process, which is daunting, you know what I mean, to say, at least for doing it. So how has that compensation changed? Are you getting usually a higher share? And like I said, it’s all deal specific, not gonna hold you to I just how a typical like business plan compensation works.

Andrew Brewer (35:21):
It’s actually fairly similar at least in the deals I’ve done to, you know, like multifamily or syndications like that. And that may be because I, I initially kind of looked into, you know, multifamily syndication before I really settled on development and, and found that as my niche. But it’s, it’s fairly similar. I would say, you know, some key differences is that, you know, you don’t have an asset management fee, you would have a development fee instead. Generally there’s not an acquisition fee or as large of an acquisition fee. Now I know that, I mean, you know, you know, some people make the argument that there shouldn’t be acquisition fees in, in multifamily either. And I, you know, having seen some people be exposed as bad actors in the space over the last couple years, I’m more inclined to agree with that.

Andrew Brewer (36:19):
I, I have sometimes taken acquisition fees. Generally it’s, it’s quite nominal though. You know, it might be, you know, 10,000, 20,000, something like that, like pretty small. And that’s more, you know, and, and also a, a reimbursement of expenses upfront. And for me that’s more like, you know, okay, if I just spent six to eight months putting this deal together, you know, 10 to 20,000 is, you know, probably I would think appropriate for, for that amount of work, plus all of the expenses that I paid out of pocket. Which, you know, for me, I mean, I’ve had deals where I’ve spent $120,000 out of my own pocket doing preliminary engineering and earnest fee and you know, fees, third party studies, all that kind of stuff. I, I honestly, I haven’t done many deals with development fees. I know some people do.

Andrew Brewer (37:13):
I, I don’t. Maybe that’s just more, you know, me being scared, you know, I’m not sure, but I, I never want to be in a position where a deal is not working out like I wanted it to. And then there’s a potential for an investor to come to me and say, Hey, this deal didn’t work out, you know, I’ve lost money, but I also know that you made money on this development fee, and that doesn’t sit right with me. If I was a passive investor and I am a passive investor in some deals, that would be my feedback is like, you should not be making money if I am losing money. So I just don’t ever want to put myself in a position where that conversation could be had. I like to consider my money earned once it’s earned. So once it’s in my pocket, I don’t want it to come back out, right?

Andrew Brewer (38:04):
I want to say, no, I earned this money and you can’t say that I didn’t because I did my job. Well, and, you know, this came as a result of that. So that, that’s maybe just more me personally not taking development fees even though sometimes I write them into the deal but it will, but that, but then it would be like, okay, but I’ll get paid this fee at the end of the deal before a profit split, for instance. Like, we’re gonna return all the investor capital and then I will get my development fee and then there will be a profit split, something like that. But generally for me, I, I take my, my, my money at the end, you know, and I, and i, I do try to structure it so that I get a higher split of the potential profit.

Andrew Brewer (38:50):
I may give a higher preferred return in a lower split of the profit. You know, because I, I do work hard and, and I’m also taking the risk that, hey, I’m gonna work for two, three years for nothing. You know, I wanna make sure that, that there’s, you know, upside for me at the end, you know, like if I’m gonna take a low split of the profit, I, I may as well take money along the way if the upside isn’t there. For me, it’s risk reward, right? You know, if, if my risk is higher, I want my reward to be higher, and if I’ve structured the deal so that the risk to the investors is lower, then the return would be lower. But it’s, I mean, it’s pretty similar to, to anything else. You know, there’s a potential for an acquisition fee, maybe, maybe not.

Andrew Brewer (39:37):
There would be a development fee. And there would be a profit split at the end. You know, that’s typically how the comp compensation works. And that’s for the developer. Now, if you’re also the GC or something, there would be GC fees or architect fees or something like that. I’m not a gc, so I don’t get a GC fee. I’m not the architect, I don’t get the architect fee. I’m just a developer. So that’s, that’s how I see compensation typically done and, and how I like to do it, because it’s very important to me to make sure that investors are taken care of. And if for some reason the deal isn’t going the way it should, I just don’t want anyone to ever think that I was profiting off of somebody else, you know, losing money or that I’m getting paid regardless. Like, I, I don’t want to have that conversation.

Andrew Brewer (40:25):
If there’s a deal that didn’t work out, I at least want to be able to go to the investors and say, Hey, like, this deal didn’t work out for, you know, whatever reason. Hopefully it’s not because of me. I’ve never had a deal where that’s the case. But you know, at least I can say, look, I worked on this deal. I did everything the best that I could. I made no money on it. You know, the deal lost money, that’s unfortunate, but you can at least know that not a cent went into my pocket. I think that’s an, an easier <laugh> conversation to have.

Charles Carillo (40:59):
Yeah, that makes perfect sense. Yeah. I mean, getting, if you’re the GP on a deal and getting your upfront costs covered and some of your time covered that went into finding the deal and putting it together, I think, you know, is a reasonable, reasonable expectation. You just have some people that obviously they, you know, getting one and half percent is an acquisition fee or two percent’s much different than someone trying to get 5%, you know what I mean? Or some sort of kind of crazy number. And that’s where, that’s where the bad name comes, you know what I mean? Someone that’s like, well, I under underwrote 150 deals and we went, we did this many offers and we did this and we spent all this hours. That’s why I’m taking a 2% fee. Which is different than someone’s like, all right, well, you know, we looked at 10 deals or 20 deals and you know, 5% on every deal, no matter how easy or hard it’s to find it is a different model that I don’t, I don’t think is a a long-term solution for building a relationship with investors. But Andrew, a lot of great information. Thank you so much for diving deep into ground up construction with us and the listeners. How can our listeners learn more about you and your business? Yeah,

Andrew Brewer (41:54):
You can visit my website. It’s iron gall investments do com. That’s I-R-O-N-G-A-L-L investments.com. You can also just shoot me a direct email. My email is just andrew@irongoinvestments.com. You can find me on Facebook and LinkedIn. Those are the two platforms I’m the most active on. More active on Facebook though. But yeah, just just hit me up. I’m always happy to chat development or speak to people that are interested in, in getting into it or investing in it or, or whatever. Just love meeting new people, making new connections. So yeah, just hit me up or visit my website.

Charles Carillo (42:31):
Thank you so much, Andrew, for being on today and looking forward to connecting with you here in the near future. Yeah,

Andrew Brewer (42:35):
Thanks so much. I appreciate you having me on.

Links and Contact Information Mentioned In The Episode:

About Andrew Brewer

Andrew Brewer is a commercial operator and developer who brings years of experience in many facets of real estate to IronGall Investments. Before starting IronGall Investments, Andrew had a successful career as a stationary engineer. As an engineer, Andrew oversaw operations in high-rise commercial facilities valued individually at over $200M. He successfully completed full building turnarounds of underperforming commercial assets, which led to improved operations, lower maintenance costs, and improved resident experiences. In addition to his engineering work, Andrew has consulted in construction defect litigation lawsuits. He has assisted prosecutors in pursuing judgments in excess of $60M and overseen commercial reconstruction projects valued individually at over $12m.

Andrew formed IronGall Investments in 2017. Backed by Andrew’s experience in commercial asset management, construction defect litigation, and commercial reconstruction, IronGall Investments began sponsoring and developing multifamily, townhome, and single-family home communities. Since 2017, IGI has served as the lead sponsor and lead developer on multiple ground-up development projects and land subdivision projects comprising hundreds of residential units valued at over 160 million combined.

IGI has also acted as a General Partner on multiple projects comprising hundreds of apartments and mobile home units.

Andrew works tirelessly to keep all of IronGall Investments’ projects running smoothly. He rigorously evaluates all potential opportunities using IronGall Investments’ landmark “Systematic Selection” approach to project evaluation, which includes a nuanced analysis of the strengths and weaknesses of each particular project and corresponding market. By conducting an extensive review of all the factors that could impact a project’s success and profitability, Andrew can develop and implement cutting-edge business plans that take full advantage of the benefits of each market while providing multiple strategies to shield against any downsides.

Andrew received a BA from UCLA, where he double-majored in history and anthropology. He was on the dean’s list for each quarter that he attended. Upon graduation, he was awarded Summa Cum Laude Honors, College Honors, and Highest Departmental Honors and graduated in the top 20 of a class of over 3,000. During his undergraduate studies, his thesis paper on “The Evolution Of Courtly Love” was selected for publication by the National History Honors Society.

Andrew is a competitive epee fencer in his free time and holds an “A” ranking, the highest ranking awarded by the United States Fencing Association. Andrew ended the 2020 Olympic qualifying trials ranked 34th in the USA in the Senior Men’s category.

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