One lesson from our foray into ground-up construction

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We’re closing today on what will become either our second or third ground-up project (depending on how you want to count this one).

In going through the design / permitting process, I’ve already learned a pretty valuable lesson, which I’ll share here.

I always wondered why investors wanted to see a higher pro forma yield on a ground-up deal than they need on a rehab. After all, it’s all just construction, right?

Wrong.

The reason you want to see a higher yield on the pro forma for a ground-up deal is that, to paraphrase von Moltke, no building plan ever survives contact with the city.

One way or another, some obscure, arbitrary, ridiculous rule from one of the myriad city desks which need to sign off on any new project will result in you having to build something that is not quite the optimal building you envisioned.

So, your project better have enough margin to survive being ground-down by the bureaucracy.

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