BIGGEST RISK with Erik Hayden

J. Darrin Gross:

I'd like to ask you, Erik Hayden, what is the BIGGEST RISK?

 

Erik Hayden  

Sure, and this is a great question, because this is what every investor should ask whenever they invest into a property or a fund is what is the risk versus return because that's what matters when you're looking to make your investments. When you look at ground up real estate development, which is really what urban catalyst is, you really have to compare it to a group that goes out and buys existing stabilized real estate assets. Because you have a much better idea of what you're getting into, if you're buying an asset that has a tenant, it has a cash flow, it's already in existence, and if it's a piece of dirt that I'm going to build a building on, and there's a whole future. So really in, in ground up development, there are four major risks. The first is pre construction risk, and that is, am I going to be able to get building permits and approvals from the city to build the buildings I say, I'm going to build. And here in downtown San Jose, that risk is significantly mitigated, really, because the local government wants to see development happen. And they're very clear with developers early on in the process as in way before we enter into the contract to buy the land, say, here's what you can do, here's what you can't do. And they've been really true to their word on that. So as far as other jurisdictions here in the Bay Area in California, it's not quite as easy in a process so that risk is much higher in other jurisdictions here in downtown San Jose, that risk is significantly mitigated. The next risk that we look at is called land development risk. That's there are things associated with the land that you just can't see. I mean, there's environmental contamination. There's liquefaction geotechnical risks, there can be underground structures that you don't know about. There can be landslides, there can be water tables, all sorts of stuff. And of course, we do a lot of studies before we acquire any property to make sure that we know everything that we can possibly know. But I'll tell you, one of the reasons why I like doing development in downtown San Jose is because it's flat, I know it's flat, I know that there's a high water table, so I don't build any underground parking garages. And I do all those studies to make sure I know how to mitigate, you know, build my structural systems for a geotechnical standpoint and my foundations, and how I'm going to clean up any environmental contamination that's associated with the property, I need to be able to put, when I say put a number in a box, right, you got to understand how much your risk costs. The next type of risk associated chronic development is construction risk. And this can be a bad one. But in order to mitigate that, we do a couple of things. The first is, and this is a bank requirement, every ground development project we do, we need to have a guaranteed maximum price contract with our general contractor. So we use third party general contractors. And really the way that those work is they say, here's the price we're gonna build this building for. And if we go over that price, it's on us not on you. Now, a couple caveats to that. The first is it has to be a large enough general contractor that they can handle those cost overruns, if they happen, so you can't have them just go out of business on yet. The second is, their bidding a set of plans, those plans better be clear up your architect, let's hope they didn't forget to put doorknobs on the third floor. Because if they did, that cost is on you as the developer. So we have a team of 12 development and construction professionals here at Urban catalysts, where we have a ton of experience diving through those construction plans to make sure that they're accurate and complete, so that we get the best price on our guaranteed maximum price contract. We also, of course, carry contingencies associated with the project so that there are cost overruns, we have money to pay that. And then the last thing is a risk that everybody's going to take, which is market risk. The difference between a grounded development and a project that's existing is we're anticipating what is market risk several years from now, because our buildings take a while to build. So that looking into the future market is that additional risk, we mitigate that risk by doing business here in Silicon Valley, one of the best real estate markets historically in the country, one of the last places to go into a recession, one of the first places to recover. Those are the four types.