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McNellis: A Little Help From my Friends

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McNellis Partners Palo Alto

Making it in Real Estate (Part Thirteen): A Little Help From my Friends

By John McNellis

John McNellis Partners Making it in Real Estate Palo Alto commercial real estate advice how to be a developer advice lessons
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Lighthouse keepers can do it by themselves. Developers can’t.

That said, new developers typically need to pull off at least their first deal on their own, playing every instrument in the orchestra: investment, leasing and mortgage broker, contractor, day laborer, property manager, janitor, lawyer and even accountant. There is a benefit to this wearying exertion; just as a conductor knows how all of his musicians should sound, you should have a good feel for what your service providers do and trying it yourself is a quick way to get it.

As a developer, you can stay small—doing fixer-uppers—and be a one-man band. This would be a mistake for the ambitious. The moment you can afford to have someone else do it, your time will be too valuable to waste painting houses, chasing loan quotes or keeping books. If you have the desire to tackle larger, more complicated projects, you will need help, particularly with the skills you lack. The question is: Should your help come from consultants, employees or partners?

First, let’s put money back in the drawer; financial partners are far too important to be lumped with any others in the development process. They—and their pros and cons—will be dealt with separately in an ensuing article.

If prudence means more to you than an old-fashioned name, your ascent from solo act to major development firm should entail an interim step of employing consultants and service providers on an hourly basis only. As long as you can rent any profession—legal, architectural, engineering, whatever—and still get the service you need, that is, first-rate work on the day you need it, you will be far better off renting rather than buying. Initially, the math is simple: If you are spending $100,000 a year in legal fees and your lawyer is making $200,000 at her firm, it would be crazy to hire her. (Yet rookies sometimes do, trying to impress the outside world with their size). Less intuitively, even if your outside legal bills were to increase to $300,000 a year and you could hire her for $200,000, the flexibility you retain—you can cap a consultant like a rotten pipe—may well be worth the extra $100,000. Employees are expensive. No one ever lays off a suddenly superfluous employee on the first day a big project is lost; months drag on before even the flintiest developer pulls the trigger.

Renting rather than buying help is obvious. As obvious, but as often ignored, is the way to get the best service from your consultants. First and foremost: pay your bills on receipt. Second: treat your consultants with friendship, kindness and respect, make them feel part of your team; lunches, drinks and handwritten thank-you notes work wonders with harried service providers. On the flip side, if you question his bill, if you tell your consultant he should have finished his task in ten hours rather than the twenty he billed, you’re accusing him of at best incompetence. He will understandably take this as an affront to his integrity. Rather than continue to employ—and badger—a resentful consultant who’s going to bottom-pile your work, negotiate his bill if you must, pay him and replace him. Don’t commute over burned bridges.

The trick to getting the highest quality work from consultants is this: Hire the most experienced person you can afford who will actually do your work. Remember, you are always hiring an individual, not her company or firm. It does you no good to hire the fanciest firm in town if a junior associate who knows less about real estate than your mother-in-law is assigned your work. One way to adopt this precept is to hire well-seasoned sole practitioners.

Last point on consultants: think Noah’s Ark. You need two of each of them, two contractors, two architects, two engineers, two escrow officers and so on. And they should know about one another. Why? Because, putting aside competition’s salutary effects on service and cost, you need a back-up plan. Life trumps business and, sooner or later, your favorite consultant will be unavailable to you, perhaps at your deal’s most critical moment.

You can outsource your entire orchestra for a good while, but one sunny day you will be sitting in a fancy office, working a deal when the bemused seller will interrupt your pitch to ask, “Who’s this we?” If a single pilot can’t land the plane and you only achieved we by throwing in your border collie, it’s time to bring in either partners or key employees.

This can be a tough choice.

While employees will cost you more than partners if you fail or have only middling success, they are cheap if you are truly successful. If you knock the ball out of the park and believe you could have done so without them, your partners will prove inordinately expensive. And the extra cost of partners may be misspent; doling out a partnership interest doesn’t automatically buy you better or more loyal help. Employees are often as dedicated and capable as partners. But, properly viewed, life’s about the journey and not what’s left in your suitcase at your last stop. And the trip is easier—and more enjoyable—with others helping to shoulder your losses and share in your victories. While we have all been through bad or ill-suited partners—you may have to kiss a few frogs to find your business soulmate—many of my successful friends have had career-long partners. Without mine—Beth Walter, Mike Powers and I have been partners since the early eighties—I would have ended up managing a hotel on the Mosquito Coast.

It’s your call.

John E. McNellis is a Principal at McNellis Partners in Palo Alto, Calif.