Lease Up, Late Fees, CCRs - EP22

Our multifamily strategies for tackling lease-up, late fees during the construction process, and structuring CCRs. The latter two are things we're still testing out and we'd like to go through what has worked for us this far. What's the best way to fill units with tenants when multiple owners are involved?

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Steve Olson: Welcome to the Build-to-Rent Show. Steve Olson here. I've got Sherida Zenger with me. Chase isn't here again today that gives us carte blanche to make fun of him for not being here. We love chase by the way. 

More important things to do for Chase, but thanks again for listening. Don't forget to subscribe on Spotify, iTunes, Google store, YouTube, or wherever you get your podcasts. 

One day we'll get as many downloads as some of these people on Spotify. I think Joe Rogan gets 200 million. We'll get there soon. Although our podcasts are like 20 minutes and Joe Rogan's are like three hours.  

Sherida Zenger: Interesting stuff. I get asked all the time, hey, did you listen to Joe Rogan? I'm like, I don't have three hours. 

Well, if you double up the speed. I've listened to a lot of audible books or like murder mystery podcasts and I just double the speed. It sounds a little weird. I mean, you could get through one of his, if you double the speed up. 

Steve Olson: In another life, everybody Sherida does want to be a homicide detective. 

Is that correct?  

Sherida Zenger: Yeah. I just want to solve murder mysteries.  

Steve Olson: You want to be the gotcha person? 

Sherida Zenger: Or like Us Marshals would be pretty cool. 

Steve Olson: I found you you've been up to no good and I got you. She was 13 at the time during the middle of the pandemic, you know, when I showed her The Fugitive for the first time, which is awesome. The fugitive is awesome. As cheesy as parts of it are it, it blew her mind. And I remember it blew my mind when I was a kid, The Fugitive great.  

Sherida Zenger: That probably came out when we were in high school. I think so. 

Yeah. I remember I was kind of scared. But I kept watching it and I would watch it over and over. That was like one of my favorite movies. 

Steve Olson: It's still good. 

It's so good. It's so good. Okay. 

We should talk about something besides movies, even though I got all excited about The Fugitive cause it's great.  

Here on the podcast, we have some experience in the build to rent space. We don't pretend for a second that we're the end all be all of the information. 

In fact, we have a lot to learn still and much of how we do this as a very unique business model. But there are two things that we're struggling with right now that we wanted to just kind of air out. Maybe it'll be helpful to you. If you end up kind of wandering into some of where our space is so that you're aware of it. 

And it's something to, to think about. The painful thing in the developing world is it's such a long, long runway. And sometimes these problems that you become aware of the time to fix them was two years ago. And so knowing all that you can in advance is very helpful because you, some of these things, you just can't unwind, you have to live with them.  

Sherida Zenger: And we've had to do that. 

Like we've pivoted, right? I don't know what type of you're going to go into first. Let's just go into CCNRs.  

We've pivoted because originally our CCRS was something totally different and now we've had to pivot and now we're pivoting a little bit more. And that's what we talked about today in our meeting. 

Steve Olson: Yeah. I steal this from Robert Helms and The Real Estate Guys. He always says "no investor left behind". Right.  

CCNRs "codes, covenants and restrictions". Anytime you have multiple owners fee- simple owners in a subdivision or a condo arrangement, the CC&Rs are what the HOA uses to enforce the rules. 

These get recorded against the title to the properties in advance so that if they, if you the homeowner or the tenant, or whoever that is restricted by these doesn't comply. The HOA has teeth. Yep. They can enforce it. Right.  

I always joke that it, so that you're, you know, in a for-rent community, the guy across the street can't paint his front door pink and park his Trans-Am on the front lawn and let the grass grow and everything go to pot because it devalues the community. So frequently in the projects that we do, there are CCNRs because we have multiple owners. 

Those of you that are building like a one-off duplex summer. Or maybe you're doing an entire project, a 200 door apartment complex that has one owner. You'll learn a little bit from some of this arrive. Some of it won't apply, but the fact is, is you have to have one set of rules.  

In our case, a frequent pinch point that we're working through. 

And I think we made some good progress on it today. Is how do CCRs or how do CC and Rs restrict property management? Because what, what happens when you've got multiple owners?  

Sherida Zenger: Well, you have everyone that wants their units leased up first and you have everyone that wants to play by their own rules. 

So obviously CCNR, w we're going to go into giving that to you at the very beginning. It's one of the disclosures that you're going to get. So you're going to know ahead of time. What's in the CCNRs and you're going to have to abide by those, but I think one. When we come to property management is we restrict the community too, you have to use one property manager. 

And that's because if we had 15 different property managers in one project, all it's going to do is drive down the rents. I mean, that's kind of why our property management company was even started in the first place. We had a project in the vineyard that people had come in, people had paid cash and other people had financed. 

And then the people paying cash were like, well, my unit's done. I want to lease it up. And so they released. Below market rents just to get bodies in their units while the other people had to then go to that same number. I mean, I think it was close to a thousand dollars a month. It was, it was not where it should have been around 1200, but people that had a mortgage on it were having to. 

Come out of pocket now, now their property wasn't cash flow positive, right? Because these other cash investors or other investors were just desperate to get somebody in. So I think what we created with the property management piece is to make this so that it's easy across the board for everybody and make it fairer. 

If you will. So I think that that's, so now we're trying to work through, so we have one management company. Well, what if somebody wants to self-manage, or what if somebody owns a management company because we've run into this buyer says I own a management company.  

Why would I pay you to manage my property? 

So part of the thing is our management company is charging a little bit less than what the market is right now. The market's anywhere between eight and 12% for property management. and they charge 7% as of right now which I think is great. And part of that is. We're going to manage the whole thing. We'll give you kind of a little bulk discount to manage it, but they're still are some pinch points. 

And so I think that's what we kind of want to talk through and work out.  

Steve Olson: I want to backtrack just a little bit is that, you know, the market is eight to 10%. The management contracts that we use are reflective of what's very common in the single-family rental world. Even though we're dealing with say 200 doors at a time. Owned by 25 different doctors dentists and lawyers that invested in fourplexes. 

Now, if you are doing a large apartment building, your management fee is going to be 4% or something like that in the payroll and advertising other costs on top of that. So it has to be an apples-to-apples conversation when you're talking management. Of course I recently, and some of where there's friction in this business model and we've tried lots of things over the years to make it better. 

One thing that makes all the friction go away, it's just a really good market that, that covers all your mistakes. Right? So in the event that you don't have one of those, this is when your CCNRs are going to really come out because you know, a good market covers everything. But I about 18 months ago, I invested in syndication, an apartment building. 

I put some money in and it's, you know, it's essentially a partnership. And a couple of days ago, I got my first. Distribution check cause they had to go remodel this whole thing. And it's a whole big, long process, which I knew at the beginning. But the nice thing about that one is that they, they get a certain amount of leases every month and they certain amount of net operating in. 

You as an investor, benefit from that based on the amount of capital that you put in, you benefit across the board. The problem we run into on fourplexes is if there are 200 units done and the management company is going through leasing and they get seven leases in one week, they say, yay, hooray. We're doing great. 

Well, that doesn't look great to the investors who didn't get those leases. That's the weakness in the fee simple ownership model, right? As opposed to, I own a share in a partnership in syndication, the weakness. Well guess what you get all the up and you get all the down. So if those fourplexes went up a crazy amount and Val, you benefit from all that, because you're the owner of that fourplex. 

So we have to consider that because that's, what's very much an investor's mind when construction is completed. And I think that's probably where the best place to talk about this as the construction gets completed in phases. Yep. There are very few things that, that assisted. won't give a certificate of occupancy on, right? 

Yeah. Certificate of occupancy doesn't mean your unit's ready to rent. No, no, you can refinance it. You know, it's essentially done. But if the developer has not completed the exterior sidewalks, landscaping, playgrounds, clubhouses, and we run it. All the time. And it's a big friction point 

Sherida Zenger: The city is just looking at it saying, can somebody inhabit this building? 

If they can live here. Great.  

Steve Olson: But outside there's rebar sticking up out of the ground. There's construction and scaffolding on the building next door, and it can be a bit of a problem. So our issue is you've got these 200 doors that are all going to get their certificate of occupancy probably within one year or so of each other. 

And that's all independent and investors that all have different financing that is moving through this process. And independently of that, the developer is coming in with landscaping and pools and clubhouse and that kind of stuff, which is operating independently of the guys that are throwing up the doors, for people to actually do. 

It makes me go, why do we do that?  

Sherida Zenger: It makes sense why people like you're going to build a whole apartment complex. Right? It's all going to be done at the same time. They don't just say, oh, this floor is ready for people to move in. Oh. And then we're going to do this floor. And then this floor. It's the same as a hotel. 

Steve Olson: Or a full building at a time, and they can responsibly lease that building and all the investors in that project receive an equal or according to their share of capital. 

What results in that building. Yes. And the guy over here isn't mad that this guy got Elise and he didn't because you all have the common goal.  

Sherida Zenger: Hundred percent. And usually, that can have syndication, right? They're answering to one person, even though there are multiple people that are invested in it. There's one head dude that there everyone's answering to. 

Or if you own an apartment complex, You're answering to one person. That's why it is tough on the property management side. So I empathize with them where they're having to answer to a bunch of investors. So we have five fourplexes that are done, you know, kind of going off your example. 

Well, if they signed seven leases, well, if my unit wasn't one of them. Yeah. I'm ticked because I want that income. I, yeah. I mean, it's just, again, the good with the bad.  

Steve Olson: That's where the CCNRs come in is because the worst thing you can have to happen in the middle of all this craziness that we've just described is investors getting frustrated, which many times are understandable. 

Other times I'm like you shouldn't be a real estate investor. Your skin's not thick enough. Yep. Right there. I've seen all kinds. But the worst thing is for them to get frustrated and say, I want my own property, man. Because now we have somebody else putting signs everywhere. Somebody else advertising online, undercutting a lot of times saying incorrect things about the actual build because they weren't involved from the beginning wanting to use the common area. 

This is one we're dealing with in a couple of places where you got a couple of agents fighting over the leasing office. That is the HOA and it's, it's bad. It's not, it's not a good thing. Now, when everything is leased, many of, much of this headache goes away a hundred. Some of it's there under the surface, but, but you know, it's significantly less inflamed. 

And so that's why you would have a restriction in your CC and RS. To say you got to use our property manager or most of you, and you really find out what you're made of when that gets tested.  

Sherida Zenger: Because you've got to the property management still has to perform, right? Like we're not just saying, oh, you have to use this property management company, and good luck. 

Oh, well, try to figure it out. We're there are things written in there that they have to perform to a certain standard. So I know one thing that we're working on and we put into a lot of our CCNRs is that 20%. Can be self-managed or managed by a third party, but it has to be approved by the board, but that's also after they've already used it, been with property management for two years. 

So we require management for two years from when your building is completed. That's because we want you to know that, Hey, it's going to take some time to stabilize. So be prepared for that. We build that into our proforma. So we're kind of telling people, Hey, plan ahead. There may be some months that you're going to have to pay a little bit of the mortgage or, you know, HOA, whatever it is, but plan ahead for that. 

And then. Just be patient with us, be patient with property management, they'll get at least up and they'll get top dollar for it. And that's what they always try to do. But they do, they kind of have a crummy job, but after that, if we say, Hey, if you're not happy with them after two years, then yes, 20% of the project can sell or use a third-party management company. But again, it has to be through approval through the HOA. 

Steve Olson: And at that point, it probably matters a lot less because the development is stabilized and what we're trying to achieve here. And by the way, we'll keep you posted listeners on this. This is where we're trying it out. We're, we're trying to balance the continuity of one manager so that the tenants all have a similar experience and know what to do, and we can get good reviews for the community. 

We're trying to balance that with some flex and liquidity. Right, because sometimes investors for whatever reason may need or want to use somebody else. And you can't just put a hard, no across the board, but you know, you usually during that initial turnover, you need that because having somebody else right into town, it's a nightmare. 

Sherida Zenger: Over the past projects that we've done... we haven't had really this 20% rule in all of them, but for the. I don't know, two years, we've probably had that 20% rule written into a good portion of our CCNRs after that initial two years. How many people do you hear from that? Say, Hey, I hate property management. 

I want to use somebody else. It's extremely rare because I think by that point you're getting income. Yeah. It's turnkey. You're not having to deal with it, that property management stilling with everything. And so I think, like you said, a lot of those problems that headache, that stress goes away, you kind of feel. 

Kind of some of those pinch points in that pain that it was. And then usually people are like, Hey, what do you have next for us? We want another project.  

Steve Olson: Well, and that's why we sell that stuff at a lower price than on the open market if it was already built and leased because that's the sweat equity that stresses you go through on the initial lease-up. 

That's how you're earning that spread because there are so many investors out there that, you know, rightfully so don't want to deal with that. But if you've got the appetite for a little bit rarer, And can have a thick skin going through that whole construction turnover lease-up process. There's, there's usually a little bit of a reward on the back end for you. 

Sherida Zenger: Absolutely. We'll keep you posted on how it goes. This is our latest iteration on how to deal with that, that kind of friction communicate it and model it out. You know, when we put it probably about six months of operating expenses then. For an investor, they know, okay, while I'm going through the headache period, at least my projected returns are reflected. 

And I that's been built into the financial model. So whether you're doing that on a one-off or even maybe your own apartment complex, that's something you have to do as well. Investor expectations, coordinate the lease-up, make sure everybody is benefiting as equally as possible, but our business model is kind of weird. 

So we started doing that. And I think that has helped with our property management questions as well. Right. Because people would get frustrated. They think my unit's done. So I want to be leased up right now. And so now talking about that ahead of time on the proforma, having that as a line item to say, Hey, plan for this, where we've already set this expectation for you. 

You may not use all six months of this, you know, but property management has said, Hey, give us six months to get your fourplex fully leased up. We think by that time, we can have you fully leased up. If not. Yeah, so plan for the worst. And I think that's has taken so much stress. It's like the headache of dealing with that client and having to reset that expectation. 

They know it now. 

Steve Olson: And they have valid concerns. There's that friction point between reality and the business model. And it takes a few, a few months for the two to sync up.  

Sherida Zenger: Well, and I think that was one thing again like we didn't have that on the proforma before. And I think now just addressing that sometimes like just letting the elephant out, right. 

Hey, we're going to tell you, this is not, may not be a fun process for you, but this is what it looks like. People can stomach that a lot better than if they didn't know and hadn't planned for it and now their building's done and we're like, oh, by the way, you don't have tenants for three months. We're going to get back. 

Steve Olson: If I think through it right now, we've got maybe four projects that are in various stages of construction, complete completion and, or lease-up. And in three of them, it's going pretty well. Many of that stabilization and operating reserves are actually not needed at all. 

And when it's done the person's really, really happy and say, when can we do this again? And in a very good market, that's easy to achieve that result. We have another where it's not easy where they're using all those operating reserves and that's a whole complex story that, that kind of goes off a lot of what we've been talking about today. 

So it just takes, it can take some time, but okay. So that, that's one thing we wanted to talk about today. Air out our dirty laundry as we, as we try to figure those things out. Here's another one. How about late fees?  

Our builder team, on most of the projects we're working on, is getting clobbered on late fees right now. That's because we use a fixed bid contract and a fixed time contract of 12 months.  

So where do you see that being the worst? 

Sherida Zenger: In our Idaho market. Right now we have two projects up there. We're getting clobbered, because, and again, we've talked about this on the podcast several times, right? 

Labor and materials shortages, and just getting people to show up and finish the job. And right now our builder, where we had a call today, we're sending out some late fees to a bunch of investors. 

Steve Olson: Lots of late fees, that's what the contract calls for. And the investors are mostly understanding. 

Some of them are frustrated and I get that. This has taken longer than anybody.  

But you know the materials kinda are coming in waves. Some of that in this supply chain nonsense that we've all been going through. Get solved when you solve one though, another is a problem, the one that's just not getting solved as the labor. 

I even heard that our, our teams up in Idaho are not allowing workers to put phone numbers on their trucks, no signage.  

Sherida Zenger: No, they do not want people to know where people are coming from so they don't get poached.  

Steve Olson: I mean, I'm raising my prices if I'm a plumber like if you're trying to hide me because somebody's going to come to offer me more money, that's just crazy. 

I mean so that we're having to do that and just getting the labor to sync up is extremely, extremely difficult.  

Yeah, we're headed up to Idaho next week. So we can give obviously more of an update kind of what we see up there because I'm sure things have changed even since we've been up there last, which was a couple of months ago. 

Yeah. I mean the good news, you're late, but the market has gone up so much that rents are coming in higher, but you got to, it's going to be late. 

Sherida Zenger: It's crazy. We sent an update out to our clients saying we're going to be late, expect some late fee checks coming in here pretty soon. 

And I had one client reply and say, Hey, when do you expect my unit to be done? I ended up replying back and said, Hey, we're, it's looking like May of this year. And they said, oh, that's a little, you know, two months past what we had thought the last time I said, I understand your frustration.  

I own in this project as well. I'm affected too personally, the plus is, you have a lot of equity in your property. Values have shot through the roof up in Idaho.  

Plus property management is now getting about $200 more a door in rent in that project. So now, I mean, if you have a fourplex that's $800 more in cash flow than what you had previously expected or that we had projected on our proforma. 

So there, there is a negative to it, right. You're having to wait. It's frustrating and you're wanting something to be completed and have this asset start performing for you. But on the flip side right now in this market, this isn't always going to be the case. They're actually walking away with some really good equity in their units and higher rents. 

Steve Olson: You have to have a big global view of it because the knife cuts both ways, right? labor problems late. Well, that guess what? That means. All the other developers and builders in the market are having a hard time. This means the inventory isn't getting to this population that needs it, which means we have more dollars chasing a limited set of goods, which means more, more rent. 

Right. So it's just in real estate. It's just challenging to, you have to look at the whole pie over a long period of time and it's easy for good or for bad. To zero in on one thing on that timeline and let that define your entire experience. Yeah. So you might say all my rents are way up. I'm the king of the world. 

Well, over time, maybe it's not a great project, or vice-versa it, it cuts both ways.  

Yeah. Cool.  

I didn't think that this, the sequel to The Fugitive was all that great Us Marshall.  

Sherida Zenger: Maybe I did watch it. I don't know. 

Steve Olson: I have a theory and you know, you can go to build a rent show and send us this very important message. 

But Tommy Lee Jones, the actor. Love him, but he has played the exact same character in every single movie that he's ever been. I might have a 10% margin of error on that, but I would challenge the listeners to identify a movie where Tommy Lee Jones, isn't the semi-callous law enforcement official, who is tracking somebody down. 

Sherida Zenger: Isn't that funny? How do some of these actors and actresses get stuck in this role? Did you ever listen to Greenlight's by Matthew McConaughey? I did not. So he, that book's phenomenal. Okay. Everyone go download that book. I'm giving props to him. Phenomenal book. It, he is one part of it, he's telling how he's so sick of doing romcoms. 

And he's like, that's what I'm known by. And he finally decided I'm done. I'm going to pivot. I'm going to be somebody different. I want to take on some different roles. And so it was kind of interesting cause you think back and you're like, oh yeah, that's what his character was. But he was like, I'm so much more than that. 

And I have more depth. And I want to play other roles and stuff. So it was kind of, I mean, I think it was like Dallas buyers club or whatever that right. So you see him in a totally different light, but I think some of these people get stuck in one way and bad. Yeah. It's not a bad thing, but it's kind of funny. 

It's kind of fun to see these people go in different ways. 

Steve Olson: Yeah. Some of them figure it out, but some don't  

Sherida Zenger: I start to not like people, cause I'm like, I don't like you because your character is always a bad person or a mean person or... And then I'm like, I don't like you as an actor or actress. 

And I'm like, why do I do that? 

Steve Olson: Well that's very important information haha.Thanks for tuning in everybody. Catch you next time.