The First and Last Subdivision I Ever Did

High leverage + No Cashflow + Novice Developer = Busted Project

Want a great recipe for losing money and maybe some friends over a real estate deal?

Here's my story of the first and last subdivision I ever did.

Back in 2016 when San Francisco Multifamily got too pricey, my focus wandered and I was lured up to the North Bay to check out vacant land.

My partners and I had no desire to get into land development but I had visions of of creating a weekend retreat in the country, which somehow justified countless excursions north when I should have been doing real work.

LESSON 1

Don't choose an investment strategy because you're bored, or too lazy to look seriously at alternatives.

If instead we had started buying multifamily in literally any market but San Francisco, we would have done very well. Imagine buying in 2015 with a 5-7 year business plan.

And so I stumbled upon a sloped 15-acre piece of land in Sebastopol with some old barns and eye popping views an hour north of SF, surrounded by vineyards and North Bay foodie hotspots.

I walked the land, soaked in the vibe, and did some cursory due diligence to discover we could subdivide into three lots. The plan was hatched:

- Pitch investors that they could get leisure property use with investment upside
- Entitle
- Subdivide
- Sell two lots and keep 1 for free

It all seemed so simple on paper.

LESSON 2

Its never as simple as it is on paper (obviously).

I dramatically underestimated the cost, time and complexity of what should have been a relatively straightforward subdivision.

I discounted things outside my control like staffing shortages at the county planning department, months-long waits for responses from federal agencies and other things seasoned developers would have known to build into their initial assumptions.

Flying high with a good track record of recent investments, we managed to collect enough equity commitments to push the deal over the finish line.

We were upfront about the mix of leisure and investment, so investors knew what they were getting into. And like us, they assumed that our success in multifamily would translate well into the new project.

LESSON 3

Success in one property sector doesn't automatically mean you can do it in any sector: There are more nuances than similarities.

We had to use hard money to close the deal, but had a friendly lender that agreed to finance the improvements and development costs, as well as defer interest payments.

LESSON 4

Just because a lender will finance you project doesn't mean its a good project.

I couldn't have been more thrilled to get started: Something new and an excuse to get out of the city and into wide open spaces.

As I began the entitlement work, I organized company outings to the property to clean it up so we could enjoy afternoons in the fresh air and weekends with the family.

Which we did, and for a period of time the project was realizing all my dreams.

I camped out in the shade of the trees with my growing family, one of our investors held their son's first birthday there, and we held team building days painting, digging and moving piles of gravel one shovel load at a time.

But as the months marched on with little progress on the development front, investors began to wonder if we'd have enough cash to get to the finish line, and my partners were not thrilled about how much time I was spending at a planning department hours away from where our core business lay.

LESSON 5

Acquisitions is the representation of a team's investment directives, not the view of a single person. If you forget this, you'll drive a wedge in any partnership.

As development delays and costs piled up, it became clear that our debt-only financing strategy was going to get dicey. So we polled investors to see who wanted to pony up a bit more cash to help push the subdivision over the finish line.

Crickets.

Not only were the no takers for a capital call, but some of our investors were wondering if we couldn't just sell all three lots and book a profit.

Several were in down payment savings mode, looking to buy their first homes for their growing families. Leisure be damned.

LESSON 6

Personal investment objectives change, which is why it’s such a bad idea to mix leisure and speculative investment - especially when not all partners have an equal say (inherent in any GP/LP structure).

As the project soured, so did my connection with the land.

I no longer felt happy and free up there, I began to feel guilty for even being there.

And that is when I knew it had to go.

This was not my personal passion project, this was an investment made with other peoples' money. And even though we had made all this clear from the outset, sometimes all the disclosures in the world don't matter.

LESSON 7

Know when to cut the cord. There is no formula for knowing its time to dump a project. Sometimes its in the numbers, sometimes its just a feeling.

But when you know, you know.

The writing was on the wall for my little project, and a brutal fire season which soured homebuyers on anything north of the Golden Gate kicked me in the gut.

Despite my floundering I managed to actually get the subdivision approved, but to complete the work and realize the value, we'd need another $200,000 of cash that investors wouldn't put up and our lender wouldn't fund.

I was cooked.

I ran the numbers and knew we'd lose money by selling, but the alternatives were worse. Borrowing even more money to complete the entitlements in an uncertain market meant risking more than we would collectively lose by selling.

We ended up churning through two brokers before getting the property sold, and despite my hopes that we could sell to someone who would preserve and enjoy the land, we sold to the highest bidder who ended up being a vineyard developer.

Months later, I found myself in the area and drove over to the property to see what the owner had done. I missed it on the first pass.

I didn't even recognize the property.

Not only had the owner cut down every tree on the property, but he had raised one of the small barns around which we had made campfires.

My heart sunk.

LESSON 8

Don't get emotionally attached to a property you don't control.