#03 - Imprint’s First Year
How to stay alive long enough to find projects.
Last month I wrote about the kind of company that I want to build with Imprint. This month I’ll share a bit about how I’m spending my time in the first year of my business.
When I started the company, I didn’t have any projects or clients lined up. I started from zero. I wouldn’t generally recommend this, if you can help it. In my case this happened for two reasons: First, I wanted to honor my contract with my previous employer, who didn’t want employees engaged in much outside real estate activity. Second, I didn’t have much of a transition period after I resigned, during which I could start to develop opportunities.
This meant that from the first day, my family was relying on personal savings for daily expenses while I looked for opportunities. Most entrepreneurs will tell you that this is the major source of stress in the early days of a company. Luckily, I am starting this venture in the middle of my career. I’m reasonably established, I have a good amount of savings, and I have a reputation that helps a lot with business development. It would be harder if I were younger and just starting out. In any case, the name of the game in the early stages of a new development business is staying alive long enough to earn some fees. The other sources of development revenue — sales proceeds, rental income distributions, promote — only come after several years of hard work.
How I’ve Chosen To Work
There were two forking decisions that I made very early on, which have continued to shape the way I make decisions in year one.
I should start with a disclaimer. I’m about to describe two of the very first decisions that I made for my company. It’s not at all clear that these were smart decisions! Only time will tell, but I’m happy to share the rationale behind them.
Principle #1: No partners in the operating company.
It’s very common for a new development firm to pair up with an investor when starting out. This generally involves the developer like me giving up some control of management/operations and providing better-than-typical deal terms for the investor partner. In exchange for these concessions you get access to capital and perhaps other forms of support like acess to the investor’s professional network, balance sheet/covenant, and/or office capabilities (accounting, payroll, etc).
When I started Imprint, the Toronto housing market was several months into a downturn. Interest rates were skyrocketing. Capital markets were getting nervous. Lenders were providing less leverage at worse terms, and equity was getting harder to come by without major concessions. At the time I thought that this was not the environment for attaching myself to a single capital partner — they would have all the same reasons to stop or slow their investing that the rest of the market had. While I don’t like the idea of giving up control under any circumstance, I especially don’t like the idea of doing it in a market where I have little negotiating power. So I decided to focus on maintaining control over the company, and partnering only at the project level. The main tradeoff here, as I mentioned above, is needing to raise funds on a projecy-by-project basis.
Principle #2: No hourly consulting.
My thinking on this has changed somewhat, but it’s still a general rule that I’m following. There are lots of good reasons to do consulting when you’re starting out: it brings some revenue in while you’re setting up your own deals. It’s a good way to build relationships with potential investors, land owners, and consultants. On the other hand, there are downsides: there’s a hard limit to how much you can earn by doing hourly consulting (equal to my hourly rate multiplied by the number of hours I can work without my wife divorcing me). There tends to be a lot of scope creep, where you take on more and more work, and spend more and more time working on other people’s deals. You also spend a lot of time on administration, such as tracking your time, reporting, and invoicing/following up on overdue payments.
In the long run, I want to be working exclusively on my own deals. So naturally I want to maximize the time I have available to source and advance those projects, and that means reducing the time spent on other people’s projects. There is a general exception to this rule: I will consider providing third party development management when there is a path to closer partnership in the future. For example, I have done some consulting for land owners who won’t partner with someone they don’t know, and where consulting provides each of us with an opportunity to assess whether there’s a good fit for future projects.
What I’ve Chosen To Work On
There are three rough deal funnels that I initially chose to help me prioritize and focus on opportunities. These were:
Land assemblies
Workouts
“Legacy” land
Land Assemblies
By far, most of my time is spent on new land assemblies. I have a couple of partners who I work with on these. The idea is simple: We go around the city and ask the owners of great real estate if they would be willing to sell to us. If they say yes, we make offers. If those offers are attractive enough, we get the properties under contract and then start the process of applying for development approvals.
There are lots of things to like about land assembly. It doesn’t take much upfront capital to “tie up” land (get it under contract), you can drop the deal and get your deposits back if it doesn’t work out (usually because of hold-outs or problems you find during diligence), and you create a ton of value if you’re successful. There aren’t many companies doing it, so there are plenty of great sites that haven’t been assembled yet. It’s all about building trust with sellers, so there’s an opportunity to outperform the competition by being forthright in early conversations. I want to emphasize this — more than one owner has told us that they purposely killed an assembly because they didn’t like the developer who had previously tied up a bunch of lots on their block. It pays to be patient and kind.
There are downsides to assembly, of course. It takes forever. Some sites in Toronto have taken more than a decade to assemble. Sometimes a single assembly starts and fails several times before it’s completed. It can be an emotional rollercoaster, with big wins one week and a total loss the next week. It’s time intensive, so you can’t cast a wide net; you need to target the highest-priority parcels in an area where you’re interested in starting a project, and spend a lot of time with owners. Some groups spend a lot of time sending hundreds or thousands of letters and flyers; I think this is mostly a waste of paper. Nothing gets people talking like a smile and a warm handshake.
I’m currently working on five transit-oriented assemblies, two of which are reasonably far along. I can’t say much about these projects, at least not until they are fully tied up and then I’ll be happy to share more detail. Generally speaking, these opportunities are the most exciting things that I’m working on. In today’s market not many people are starting new construction projects, mostly because construction and financing costs are so high. In the long run I think there will probably be some kind of return to equilibrium and deals will pencil again; in the meantime, bringing a land assembly through the entitlement process is a good way to create a lot of value, bring in some fees, and be ready to transact or build in a few years when the market has stabilized.
Workouts
In real estate, a workout is when a borrower’s obligations to a lender are renegotiated due to default, or to avoid a default. For example, if an inexperienced developer has defaulted on their loan agreement by not making interest payments, or by missing key project milestones, a lender might want to bring in another company to get a project back on track.
I have quite a bit of experience navigating projects with a lot of regulatory or financial complexity, and I’m pretty good at turning around projects that really aren’t going well. So I initially thought of reaching out to lenders to ask about distressed projects that needed help.
Generally in a down market, the only way to save these projects (by which I mean return lender/investor capital plus accrued interest) is to radically increase the density for a given site. That might mean stopping construction or completely restarting a completed entitlement process. This is going to be hard for the original developer to swallow, of course, and there’s a lot of psychological resistance to it even when the numbers clearly indicate that it’s the right strategy. A lender or developer might reach out to Imprint is because I’ve got more experience in a given asset class, or better access to capital, or a better thesis for what can be achieved on their site.
When I first started Imprint, a lot of people told me such projects didn’t exist — this was early 2023. However, almost immediately I found a handful of lenders and debt brokers who brought forward a number of projects. Some were going into receivership, in some cases the lender had essentially stepped in to replace the developer, and in other cases the developer was trying to quickly and quietly restructure to avoid default. I’m currently having active discussions with several lenders and developers, advising on how best to salvage some seriously distressed real estate.
In at least one of these cases, we should be able to make the lender whole and create a lot of value in the process.
Legacy Land
One thing that’s somewhat unique to Toronto is a large number of “legacy” landowners, or sites which have been owned by a given family or corporation for a very long time. In my experience these are generally small firms, often run by a second, third, or fourth generation asset manager on behalf of a group of relatives.
Their basis and leverage are usually very low, they tend to get reasonably good cashflow from their properties, and they think more like family offices than institutional investors. Which is to say, they aren’t driven by conventional return metrics like IRR or cash-on-cash. They tend to be more interested in estate planning, tax avoidance, or a desire to leverage real estate wealth to support other family-owned businesses.
When I was starting out, I thought that I would be the perfect partner for groups like this. Imprint is small, nimble, and can be very flexible on deal terms. I want to own property forever, for many of the same reasons that these families do. I figured families that don’t have in-house development expertise would value partnering with a like-minded, long-term focused, build-and-hold developer with a strong track record in rental, which is better-suited than condo development for a long investment horizon.
Well, I was mostly wrong! Like many who have tried this before me, what I’ve discovered is that this is a very, very difficult segment to break into. These groups tend to value longstanding relationships and to be skeptical of new partnerships. Many of them outright refuse to partner under any circumstances, and would prefer to hire development talent on an hourly basis (see Principle #1 above…). I’m still in touch with a number of these firms, and a few of them are interested in poking around at deals together, but it’s been slower and less fruitful than I expected. Which is completely fine — live and learn!
So that’s a very high-level summary of what Imprint has been up to.
In the future I’ll try to do some deeper dives if that interests people. If there are topics you’re curious about, reply to this email with suggestions.
That’s a wrap for this month. Thank you for reading, and have a great November.