Builders in Hard Times Find Money for Commercial Jobs
With home builders continuing to look for work that will help see them through the current housing slump, and even provide an ongoing stream of alternate income once the marketplace recovers, NAHB’s National Commercial Builders Council (NCBC) has re-issued “Light Commercial Construction for Home Builders: A How-to Manual for Diversifying Your Business.”
The 2009 edition of the publication provides an extensive look at light commercial development, construction, contracting and financing.
NCBC Past President Elton Parsons, of EP Enterprises in Andover, Kan., recommends the how-to manual to anyone considering taking steps to diversify their business.
While considering the advantages of small commercial projects, builders also need to consider the requirements and pitfalls of various commercial projects, said Parsons, who was an advisor on the manual.
Lining up financing at a time when many banks have all but closed their lending windows for new residential and retail projects is perhaps the most obvious obstacle for builders hoping to diversify today, but according to Parsons and other experienced commercial builders, there is still money to be found.
They say key to succeeding is starting out small, having a good reputation in the community and networking through home builders associations to find out where opportunities exist.
A joint venture and the formation of a Limited Liability Corporation (LLC), said Parsons, “is a good tool to use if you have little or no money but a great idea and you can put together a package and take it to someone with money. Then you have to prove to the money man that you have something he will get a profit on.”
Potential investors will want to know why they should get involved, he said, and that’s why research, through focus sessions and other means, is needed to substantiate the marketability of a commercial opportunity — such as an office complex, a school or self-storage facility.
“You have to have a good project,” Parsons said. “And you need to be a good person, with a good reputation, no matter how good the project. Joint venture people will want to know they can count on you do what you say and that you’re honest.”
An Open Door at Community Banks
The banks like seeing a partnership with another builder or investors, said John Piazza, of Piazza Construction, Inc. in Mount Vernon, Wash. “Don’t try to bite off more than you can chew,” he said. Although it has become harder to get financing, he added, it’s “easier if you go to the local bank in your small town. Try to keep the loan as low as you can, and you’ll get it.”
A lot of community banks are looking for “good relationship” borrowers who have established ties through checking and savings accounts, said Dick Rokes, president, Investors Limited Group, Ltd., in Olympia, Wash., and these are the institutions that it will be most fruitful to approach.
“Go in with a good loan package,” advised Rokes, a 10% owner of a community bank. “Sometimes people come in and present the loan officer with scratching that he has to try to reconstruct. That’s not the way to fly. It tells us a lot about the buyer and his financial acumen.”
Included in the package should be such information as what it’s going to cost, whether the builder intends to draw money out to live on, a contingency if something goes wrong and a reserve to enable the project to be carried for an extra eight or nine months, Rokes said.
“Keep it simple, but give them the facts,” said Piazza, who is the NCBC immediate past president. The package should also include a one-page executive summary of what the borrower needs.
“The lending game is tight,” Rokes said. “If it’s land development, don’t bother,” and regulators are encouraging particularly hard scrutiny of residential construction loans. Even so, “there is some room for houses and more room for small income-producing properties.”
Providing loans from $20,000 to $30,000 to a few million dollars, he said, “community banks have the money for categories they’re allowed to lend in.”
Other People’s Money
“I believe in OPM — other people’s money,” Piazza said. And the money tends to be available because “people have money but not a contractor,” he said.
For example, said Parsons, a generally well-financed group of doctors with cash or access to cash might be looking for a contractor with the expertise to run the construction of a medical center. Or a growing small community that needs a new school but is unable to issue bonds might be interested in someone to build the school and then lease it back to the school district.
Piazza says he sends out a letter soliciting work in getting projects off the ground, and in return for a reasonable share of the deal — perhaps 55% — he is willing to get the permits and see the project through to completion.
“Network with people in the trade association. Just talk to other builders. They will teach you how to make money. You’ve got to communicate,” said Rokes. “The people who have the money to do the projects aren’t builders and they don’t have the expertise to get the job done.”
Rokes cited the example of his nephew in California, who is talented when it comes to residential construction but didn’t have any money when he went looking for jobs. He cut a deal with banks to help them dispose of their Real Estate Owned properties. His girlfriend sells the home and he fixes it up, changing the locks and doing whatever is needed to make it marketable.
“Without a nickel of his own money,” Rokes said his nephew is now making a good living with a crew of about 30 workers finishing four or five homes a week.
Downturn Can Bolster Demand for Some Projects
The current economic downturn has actually bolstered some of the light commercial projects that are available even where demand has generally slowed, the panelists said.
“Mini storage is still percolating along in some markets,” said Rokes, “even if it is not thriving like it was.” With two to three acres of land and some knowledge of how and where to build them, “most builders can build one,” he said. “It’s not complicated.”
Rokes suggested starting with 100 units, and when 75% of those have been rented, doing another 100 — a process that can take two to three years. Building them gradually makes it easier to gauge the demand and get the right mix of units by size.
Rokes said he built 40 12- by 40-foot units and was able to rent them to electricians, plumbers, heating guys, remodelers and painters for $300 a month. “They’re running their businesses out of them.”
He said he has also been picking up customers who are downsizing or losing their homes. Storage units aren’t recession-proof, he said, “but you’re at the lower end so you can do fairly well.”
Hard times for the retail industry are also generating work from empty stores that need to be returned to a vanilla shell in preparation for the next occupant.
Parsons said he is looking for convenience stores. “A lot of these companies want to lease instead of own,” making it possible to buy the space from the owner, fix it up and lease it back to them. “This is then more than just a rehab job, you become an owner.”
Building one duplex a year and renting it out is a reliable strategy for generating income over the long-term, according to Piazza. “In 10 years, you’re a millionaire,” he said.
"Light Commercial Construction for Home Builders" includes:
- What’s different and what isn’t when comparing light commercial and residential construction
- Information on building for investment, building for the private client and bidding and building for the public sector
- How to finance commercial projects
To order the $25 publication, e-mail Kisha DeSandies at NAHB, or call her at 800-368-5242 8455.
May 14 Audio Seminar to Examine Commercial Opportunities in Stimulus Package
"Light Commercial Construction for Home Builders” will be offered at a 25% discount to participants in next month's hour-long audio seminar, “Stimulus Opportunities for Builders: Exploring Commercial Opportunities in the Stimulus Package.”
NCBC and The University of Housing are sponsoring the seminar, which will be at 2:00 p.m. EDT on Thursday, May 14.
Participants will learn how to use the economic stimulus package to diversify into commercial construction and find out:
- What parts of the stimulus package are relevant to their business
- How members are getting involved in stimulus-funded projects
- Private funding alternatives that are working right now
Scheduled speakers include builders with more than 20 years of experience with government contracts, and an attorney who specializes in contract law.
The registration fee for the audio seminar is $79.
The seminar will include a panel discussion as well as questions from the audience. Questions can be submitted in advance through Friday, May 8 to email@example.com.
To register online, visit www.nahb.org/stimulusopportunities.
For more information, e-mail Kisha DeSandies at NAHB, or call her at 800-368-5242 x8455.