Earlier in the week I was meeting with an equity firm we’ve partnered with over the years. They are experienced, and just solid folks. We have worked on several projects together, where they provide the equity to the developer sponsor, and we build the project, sort of like a 3-legged stool.
That morning, we were talking about a new project with a fairly new real estate development firm. The principal said, “The hard part is that sometimes they don’t know what they don’t know.” I followed up with, “Until it is too late.” In this real estate business, you learn by going through the ropes a few times. It’s through a few failures, some bad deals and some scars that you gain a sense of what will work and what won’t. There are no crystal balls out there, but experience helps.
This came into play recently with a historic restoration project we are wrapping up, this time in regards to contingency amounts in the pro forma. How much contingency does one budget? Too much kills the deal. Too little and you run out of money during the project, and that is “trouble in river city,” to use a line from the Broadway show “The Music Man.” A narrow trail in both cases, but here is my suggestion: While youth and energy are important, the trump card often lies with age and experience.