Have you ever considered developing your own projects? Acting as both the architect and developer has many advantages, including more control over what is designed and built, as well as a share of the profit from projects.
Today's guest, Zeke Freeman, is the principal architect at Root Architecture + Development. Zeke developed his first project a few years ago and now has several projects under his belt. In today's show he reveals what it took to get him there, including the mistakes he made with the first project he tried to pitch.
- Visit Zeke Freeman's website at: Root Architecture + Development.
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Interview Transcript and Members Only Resources:
Enoch: Hello and welcome back, Architect Nation.
This is Enoch Sears. This is the Business of Architecture Show, the show where we talk about running a great business so that we, as architects, can change the world and really make the world a better place through design. So, the idea here is to empower us with the business tools we need so we’re not worried about paying for the bills.
We can learn from other successful entrepreneurs, architects, and consultants about how to run a great firm, increase profit, and have more time and flexibility.
So, this show, right now, is sponsored by the Business of Architecture Conference which is going to be online only, happening in early October. So, I encourage you to reserve your seats for that conference. It’s going to be everything you ever wanted to know about starting a firm, developing your own projects, and getting more time, freedom, and flexibility as an architect.
Now, today, I’m really looking forward to our show. I have, with me today, joining me is Zeke Freeman, the owner and Principal of Root Architecture and Development, and he’s based out of Colorado.
Zeke, welcome to the show.
Zeke: Thank you for having me, Enoch. Glad to be here.
Enoch: Absolutely. So, Zeke, first of all, tell us where you’re at and tell us a little bit about what your firm does.
Zeke: Yeah. Where right in the heart of Denver. I think I was telling you here earlier Enoch I’m just outside of Denver. We just built a little home up in Indian Hills so we could escape it once a day. Our house kind of served to be the launching point for our new firm. We built our house about two years ago and started getting new clients who were asking us if we can kind of do the same thing for them.
I’ve had a long background in Architecture. I’ve been doing that in Denver for the last ten/fifteen years. Recently, with our new company, we’ve started doing design-build. So, we’re managing construction. We’re doing architecture for single family and duplex type projects. We’re also starting to do some of our own development which was really the harder work, the idea to kind of get out on our own. So, we’re buying and flipping houses, and we’ve got some new scrapes that we’re doing, and the single family kind of stuff.
Enoch: How long have you been on your own?
Zeke: About two years, I guess, in October. It, kind of, was a slow transition. Back then, I was working with firms in Denver that were primarily commercial. The last firm I was with was Roth + Sheppard Architects. We we’re doing work like the Denver Art Museum, and some restaurants, and that sort of thing.
I started to just kind of transition with those guys. I came on just as a contract architect. I left my previous firm because I wanted to start getting out on my own and had that opportunity to work with those guys on a contract basis, which, you know, I was pretty upfront with them that I wanted to start my own firm. Then, they had some needs in some of their projects that allowed me to start working on those that have a little bit longer leash to go after my own and kind of weave those in with the contract work I did for them.
Enoch: How long did you do that contract work for?
Zeke: I guess the two-year that I’ve started my firm, kind of, benchmark probably overlapped a year with them. So, I worked with them for about a year. About two or three months of that was just doing contracts and then I started my own projects once I was in there for about two or three months. Then, this last year I wrapped up the things I was doing with them and kind of had enough of our own projects going at that point that we parted ways. I subleased over in a different area of town, at another spot because we brought on another construction manager and we needed a little bit more room.
Enoch: So, it sounds like a good way to deal with the cash flow crunch that happens when you start a firm.
Zeke: For us it was critical. We didn’t have a lot of cash. I had a couple of other projects, but, you know, everything was sucked in to our house. Everything was kind of sucked in to that as we’re building that at the time.
I needed to make sure I can have cash flow. When I came on with those guys I left a pretty steady job. So, even going on contract is pretty nerve-wracking for me. I sat down with them and took the other six-month contract so at least I had a chunk of work that I knew I wasn’t completely cutting off the umbilical cord at once. Then, I just went really aggressive, you know, 80-hour a week kind of thing just to build our website and go and reach out to the network we already have and know what we’re doing.
I thought, at the time, I had projects that were already kind of in the food chain here that we’re going to start plowing through. They did, but they took a lot longer. So, it was really good to have a good contract-based work that sustained us while the projects that were in the cooker got some meat on them and started going forward.
Enoch: So, it sounds like a little bit more than a year of overlap when you were doing the contract work, and then about a year since then of flying 100% solo.
Enoch: Then, working for other architects previous to that, how much time did you have since you’ve been out of school?
Zeke: Okay. So, I worked all the way through school. I went to UTA in Texas for undergrad, and then came up here to Colorado, and started working with OZ Architects. That would have been like ‘04 or ‘03, something like that, and worked with them through college, graduate ‘06 or ‘07-ish.
Then, I worked with Bennet Wagner & Grody for three or four years. I then did the contract bit with Roth + Sheppard and then started our own. So, if I had to do the math there, but something like ten years-ish. Then, prior to that was doing construction and other kinds of pieces.
Enoch: Okay. So, how would you characterize your firm right now in terms of… I know the title of your firm says “Architecture and Development,” tell me more about the kind of focus, the projects you really want to focus on right now or that you are focusing on.
Zeke: Yeah. I started my firm because we really did go after developments mostly because that’s kind of my passion. I like to have control of the project, be able to deliver all pieces – the construction, the architecture, and then the end project, and have a say in those because I think we can do really quality projects as an architect doing that and have a little bit better cash flow and control of those pieces.
How I, kind of, started getting in to these is—I was looking at a model in downtown Denver. It’s fairly common around some of the core areas that you can take a single family lot, like a U2-UC two-unit zone lot, and divide those up in to two zone lots and you could put a higher end duplex. At the time I was looking at it, it was probably a seven and I put together full design for it. We put a property under contract or under option, so we had at least a piece of land that we, kind of, based the project on.
Enoch: When you say “We put a piece of land under option,” who’s “We?”
Zeke: You know, I had a real estate agent that was working for me and finding properties. Then, my wife and I, our cash would be what was in the deal.
So, the idea at that time was just purely speculative, putting together a development. I’ve never done development before. I didn’t have all the cash to do a project, but I had a pretty good network. So, the idea was that I was going to put this project together and go find investors to put in to it. So, I, kind of, followed a little bit the Jonathan Segal plan and met with some other developers [Inaudible] is a large one here in town, and got some input on how to kind of package those investment options out.
Enoch: That’s interesting. So, Zeke, you say that you… First, going back, how much was the option that you put down? How much was the purchase price of the land and how much was the option that you put down on it?
Zeke: I just put a contract on the land that we wanted a thirty-day look. So, we had a free option on it basically – thirty-day look. Then, you know, the land was, at that time, I think $275,000 which was then really cheap for the same type of model that we’re doing now. Then, I designed up the project. I bid it out to three other contractors so I had some real numbers on what the duplex would cost to build.
Then, I put together a pro forma, showed a trickle down model that would distribute out the profit at the end of the project based on the percentage of cash needed. We were going to try to finance it and raise 25% capital on it. So, we put together a pro forma offering.
Enoch: What year was this, Zeke?
Zeke: ‘08 maybe.
Enoch: Roughly? Okay.
Zeke: Probably a little later than that, probably ’09. So, the market was still not, like, you know, hot and bubbling.
Enoch: So, did you have a full time job at this time?
Zeke: Had a full time job. Doing any kind of project on the side is a lot of effort. So, we went ahead and put together a full construction document while I had full project folder…
Enoch: Full time job, yeah.
Zeke: Yeah. Then, I just spent every lunch and waking minute going and soliciting investors. This was early, so I didn’t get any real hit in there. So, it was a lot of effort for, at that time, it felt like no real result. Looking back, I can see I would never have investment in that either in to a kid who hasn’t done a similar sized project.
Enoch: Okay, why not?
Zeke: I think the two biggest portions were people want to see that (1) that person has experience doing that almost exact project so they can lower their risk – experience that helped. I had experience in the architecture side but haven’t developed a project before of that scale.
The other is people want to see a good amount of skin in the game. At that time, I didn’t have skin to put in to the game in terms of cash. We were trying to put maybe $15,000 or $20,000 and we were looking to raise probably $200,000. So, you know, most investors will want to see more skin in to the game on something like that.
I think the biggest is just the market wasn’t there yet. So, the same units that I was looking at pitching at that time were selling around like at the $550,000 to $575,000 mark. So, the back end on that was 18%. I mean, you might make a $100,000 or $150,000 on a deal like that, but by the time you buy $300,000 in land, $550,000 to $600,000 construction cost, you’re at $800,000 and you’ve got another $100,000 probably in soft and sales cost, so you’re $1 million in. You might be coming out at $1.1 million by the time you sold one. That margin was still pretty slim.
So, anyways, it didn’t go. A lot of disappointment on that.
Enoch: I do have one question. Do you mind digging in to that a little bit more, Zeke?
Zeke: Yeah, absolutely.
Enoch: Okay. So, you said something. You said that you went to other developers to maybe develop some of the financial package that you were putting together?
Enoch: Could you tell me about that process? Are this guys potential competitors? How does that work in the development world?
Zeke: I went to several other people. So, I went to developers that have both been friends and mentors in the past just to get advice on how to properly put together these packages. One of those developers is also a builder. So, that guy, you know, actually bid out a project. They do basically what I do now – design, build, and development, so he was looking at his potential construction end. So, he was very helpful on inputting on how to actually properly put this thing together so that we can go and get opportunity to get in to it.
I went to other developers that later turned in to clients that were familiar with the project and did this kind of investment. I was basically looking to see what kind of collaborative opportunities I have. So, either I pitched opportunities to those guys that we could run the construction and architecture – at that time, we were pretty open to whatever you guys can come in to the table with – or you could just invest in it and we’d run the other pieces.
Then, I reached out to other guys that were just purely small, friends and family group of, you know, “Can we put together, four piles of $30,000?” – smaller packages. So, yeah, that was kind of pretty much, across the board, who you’re talking to at the other side of the table.
Enoch: Hey, Architect Nation. I just wanted to interject a little editorial comment here. The next seven minutes or so are pretty thick in numbers. It might be kind of dry listening to, but as always, I want to bring in the information that will allow you to replicate the success of the guest on the show. So, I think that this will be valuable for those who are actually thinking about developing projects or are currently going through this process.
If you’re not interested in that, I encourage you to go ahead and fast forward about seven minutes to cut through all the meat of the numbers that we’re talking about.
The pro forma that we’re talking about, it is available on Business of Architecture. Make sure that you’re logged in to your account. If you don’t have an account, you can get one by clicking the green “Join Now” button or “Join Today” button on the upper right-hand corner of the site and you’ll have access to both the transcript of this episode as well as the pro forma that Zeke and I are reviewing for his first project.
Zeke: … percentage here [Inaudible] about $275,000 to $300,000.
Enoch: At this time, were banks accepting land banking? Were they accepting that as equity in the project?
Zeke: Yeah. They will. If you own the land outright they’ll look at that the same as equity. Also, depending on the bank… I’ve got a hard money lender that will look at architecture fees as equity as well – so, if you’ve done a full set of construction documents. Some of those will actually accept those as equity as well.
Loan required $792,000. That will be 75%. We’re looking at 6.5% interest rate at the time. Origination fees, target sales price at 1.1 million basically. Target sale per unit $577,000. So, I had a breakeven at $1.1 million, which would be $560,000, so we needed to be at least in that $575,000 range per unit.
Let’s see, we had a deferred design fee of $30,000. This is where we’re looking at putting the architecture in to the project. Then, development fees $20,000, and that was part of the soft cost. So, with the deferred design fees like I was saying here, that brought our capital requirement down from $264,000 to $234,000, which is about 17% return on investment.
Enoch: Okay. Where is that 17% come from again?
Zeke: The anticipated gross profit of $41,000 with the capital requirement of $264,000. I think that pencils out.
Zeke: Yeah, okay.
Enoch: Let’s see, I’m just doing the math now. Yeah, that’s at 15% profit. Did that $264,000 include your… Did you come up with that number after subtracting out the deferred architecture fees and the development fee?
Zeke: In terms of cash in after the capital required included the architecture fees in there.
Zeke: So, we said we were going to put those in to the project to lower our capital requirement down to $234,000.
Enoch: Okay. Alright, now Zeke, looking at this and the numbers at this first project when you first did this, how does this look to you now knowing what you know and doing these things for real now?
Zeke: Well, it was probably accurate at the time, not too far off. What’s happened recently in the market is this price for… We’re certainly in a little bit of a rising market in Denver. It’s made it feasible to really get these things done. So, we’re looking $575,000. We’re looking at at least $650,000.
Some of the things that I think that helped these set of plans at the time was actually getting a little bit of square footage in to them by just maxing it. I think this plan didn’t have the lot quite maxed out. We’ve got our full finished basement and rooftop units in these things as well.
Enoch: On the ones you’re doing now.
Enoch: Okay. Alright. So, now, with the projects that you’re doing, Zeke, how does the financial structure work in terms of getting investors on board? How do you pitch that to them?
Zeke: So, for this exact duplex model, I think I said we didn’t get investors on it at the time. There was a couple of years gap, and then some of the investors that we pitched to came back. They had land under contract or they owned land, and they had remembered us when we were pitching this thing and asked us to come in and see if we could manage the construction or do the design. So, we have two of them now that have gone up with two separate developers that kind of came through this process.
So, the way that they’re structuring it is similar to how I put in that pitch before, but those projects turned in to either architecture or construction project. Go back to your original question here, what was your original question?
Enoch: Just the financial structuring of it. If you could just lay that out again in terms of “I’m going to be pitching to an investor and I’ve put together a package.” Obviously, a large part of the success of pitching it is “What’s in it for the investor?? How do I structure his return on investment or her return on investment? I’m asking for money…?
Zeke: The projects that we’ve got now that we’ve got some investors in on have been a little bit more straightforward like a 15% return. For example we’ve got a pop-top that we’re doing. We use a private lender to finance all that ourselves, and we needed about $15,000. So, we went to friends and family, borrow the $15,000 and just did a more simple 15% interest. So, we’ll pay that as some interest at the end of the project. So, getting the cash has been a little bit easier and not as complicated as it was at the time.
Enoch: Okay. So, that one that requires $15,000 is that because the land is already part of the deal?
Zeke: So, this is 4974 Quitman. It’s up on our website. The way that one worked is it was a short sell. We bought the property with hard money. Put together the…
Enoch: When you say “hard money,” can you define that for me, Zeke?
Zeke: It’s a private lender that charges like 15% interest and 2.0% to close on a property. So, we bought it with one hard money lender, and we had a good enough buy on the property. It was about $130,000, probably something that was worth, in its current state just for land, about a $175,000. So, we had enough that it made sense to do that.
The first close we had to close quickly on it. We had two days to close on the deal by the time the bank gave us actual approval. So, we knew we were interested in this project. We have been talking with the bank and submitted the offer a long time.
When they finally gave us the approval, it was right up to the point where they were actually going in to foreclosure and then you can have it if you can close in two days. So, we went to a hard money lender that could close quickly on it. That’s the reason that we kind of went down that path and the numbers made sense enough for us to go ahead and do that.
So, we buy it with the hard money. It ended up costing us about $7,000. We put together a set of construction documents, submitted it in for permit, about a four to six-week permit process. Put together that quick set. It took about a week to put together. It ended up being pretty much a full house. We kept everything. We demoed everything except for one wall on the front of the house and a little bit of the foundation.
While it was in for permit, we bid it out to our subcontractors. We’ve got our numbers together on what the construction costs were going to be. We were able to then refinance with the construction loan which is another private lender who will do construction and land cost.
So, we packaged all those up in to one and we needed about the $15,000 – $30,000. I think it was $30,000 total for that construction and land cost is what we needed in capital. So, we put $15,000 in and then had friends and family put in $15,000. Then, we’ve taken that and we’re building that house now.
Enoch: Okay. Now, are the banks looking at a personal guarantee or how does the guarantee work on these loans?
Zeke: That is, again, the refinance with the construction in the land is another private lender. He’s got a little bit lower fees, about 12%. He’s got a 0.5% closing fee and then it’s a six-month construction loan with a six-month extension. There’s a fee if you have to extend it past six months. So, when he’s lending on it, he’s looking at the ratio of the cost to after repair value. So, our total cost, I think he has a ratio of 80%. No, I think 90% is what he’ll lend on. After repair value is what he’ll lend for the total construction and land cost.
We put together a package that was, by the time he had in his hand, it was basically full construction document, a full set of comps on what things are going in the area, and then a bid out of hard cost estimate. It takes a little time to get those pieces together. In between stages and the double close it costs a little bit extra, but if you’re going in with a little cash down, it gives a little bit of time to get that information together.
Enoch: So, does that mean that there’s no personal guarantee on that loan?
Zeke: There is a personal guarantee on a loan, absolutely. We signed off on it personally.
Enoch: So, they’re looking at your cash flow as a business?
Zeke: They look at your cash flow as a business. They look at what you have: assets, home equity, all those things.
Enoch: Is there a problem that you’ve only had your business for two years in terms of lenders looking at the stability of your cash flow?
Zeke: If you go in to a traditional bank, it will be. But, we’re going to, you know, these private lenders or hard money lenders [Inaudible]
Enoch: I gotcha.
Well, Zeke, thanks for taking us through that journey. A lot of nitty-gritty there in terms of what it takes to get a project done, but these are the things that… It’s hard to look this information up and find it, so it’s good for our audience members that are thinking about going down this road to listen to it and hear about what it took for you to put together these packages.
Zeke: So, I think one other… Our house was a simpler deal. That one’s probably worth chatting about a little bit. A little less risk appetite in doing your own personal residence, but it’s a good start to learn what the construction and what the cash is. So, we did [Inaudible] our own home.
Enoch: That sounds like an excellent segue in to the second segment. So, how about we save that for our second segment, Zeke?
Zeke: Alright. Yeah.
Enoch: Sounds good. Alright, well, thanks for joining us on the show today.
Zeke: I appreciate the opportunity, Enoch.
Zeke: A pleasure talking with you.
Enoch: You too.