The 3 Numbers That Make or Break Any Development Deal with Paul Younan

Andrew:: Hi, I'm Andrew Wright, principal of Professional Southport, and this is the Andrew Wright Property Podcast. I've built a multi-million dollar property portfolio delivering a seven figure annual rental income, and led my real estate team through thousands of sale and lease transactions in each episode. I share real deals and strategies that will help you find, fund and operate profitable property deals.

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Welcome back to the Andrew Wright Property podcast. Today we're gonna talk about feasibility studies for property developments. Today's guest is a very experienced local Gold Coast property developer named Paul Younan. Paul's experience is also that he has a construction team of approximately 40 full-time building members in his construction team.

Paul. Welcome to the podcast.

Paul:: Thanks for having me.

Andrew:: Can you tell us a little bit about your background and your business?

Paul:: Uh, yes. Um, been in construction all my life. We currently run, um, three different businesses right now. So we do, um, uh, traditional building. We do, um, remedial construction, remedial work, and also, um, form work. So, um, sitting on 40 employees right now and servicing Northern New South Wales. In Southeast Queensland and just, um, yeah, those three, um, different disciplines.

Andrew:: Just, uh, getting off the agenda of the podcast for a moment. Do you feel a massive pressure to have new deals lined up all the time when you got 40 people on the payroll? How do you, how far ahead do you need to book work to keep all those people on the books?

Paul:: Um, the business has grown over a very long period of time, so we've built very sound relationships with clients. Um, there's a forward pipeline. Projects don't start in five minutes. Some of them, we'll know the project's gonna go ahead, but it could be six months before we're required. So the pipeline in front of us is very long. And it allows us a lot of time to forecast what's happening. And the other aspect is that we can deploy the resource between the different businesses depending on what's going on.

Andrew:: Okay. Very good. So we might go through, we've picked out five deals, that we are hoping that we can educate the audience on some lessons that Paul's learned from his experience. So we'll start off with eight to 10 Badera Drive. I was the selling agent on that one. And Paul bought that site for 3.8 million just two years ago. It was an old knockdown house and one duplex pair. Paul, can you tell us what you initially wanted to do with that site and what ended up happening?

Paul:: Okay, so at the time we bought the site, we were doing some other duplex developments in Palm Beach. Um, this particular site was a bit unique because even though it was two parcels of land, it was separated by a path. A council footpath. An easement. So it was effectively two separate developments and the sites were too big to do duplexes and obviously too big for a house.

So we ended up having to look at triplexes and quadplexes. When we ran our feasibility and ran our architectural analysis, the floor plans weren't working. If we followed the council requirements, the code requirements, we just weren't happy that the living rooms were big enough. The bedrooms were big enough. Um, so that led us to go down the path of an impact assessment.

Andrew:: So just for the viewers, a code accessible application is one where you basically got some predefined rules or codes that you need to comply with. And by and large, if you comply with those rules, you're probably gonna get council approval. But if you're wanting to do anything more — a higher density, for example — and you need to go for an impact accessible application. That's what can add a bit of risk to your application. You have to invite the public for any objections and you have to advertise that you're doing it and it can be a little bit more risky, but maybe some more upside if you're successful. Is that a fair comment?

Paul:: That's correct. Yeah.

Andrew:: So in this instance, what you're able to do is take that third floor from 25% cover to 50% cover. So in round numbers that increase the saleable area by 20% on the whole project. And may I ask, was that your idea or was it your architect or town planner that came up with that suggestion?

Paul:: I think it was just an evolution of the fact that we ran all our numbers and they worked. It's just that the floor plans were just, they didn't work, they weren't saleable. So I think it was just an evolution with the whole team. We ran the design options with the impact assessment and everybody thought that the apartments were significantly improved. Things like we had a really good open plan kitchen, living dining. The outdoor living area was huge. Um, you know, we got really good bedrooms, good en suites, extra study rooms. Just all those boxes you could tick.

Andrew:: And what was your exit strategy there, Paul?

Paul:: Um, the intent was to build it. There was a development we were doing other townhouses in the suburb. The sales of those were slightly delayed, which we didn't want to progress with Badera until we sold the other project. Um, in the meantime, the family affairs had changed. So there was two other family members involved in the project with me and by the time we got around to looking at starting, they had other requirements. So they were happy to call it, take their money outta the deal and pursue a different strategy. So you sold the site with a DA approval for an uplift.

Andrew:: So in a nutshell, if we, before we go to the next deal, can we talk about Paul, you are an experienced developer. What is the main process that you follow to come up with a feasibility study and due diligence? Do you have spreadsheets or software or is it back a napkin sort of stuff?

Paul:: Um, yeah. Very simply we run an Excel spreadsheet. It's just income and expenses. Profit and loss. I've done enough over the years that I've got templates or I've got a pretty fair idea about how to present the information and do my calculations. But essentially, yeah, it's a feasibility, and it's a forecast, it's a prediction as to how the entire project is gonna work out.

To inform the numbers, you need some sort of town planning advice. And you need some sort of architectural design. You know, it could be as simplistic as saying that the code accessible rule says that you're allowed 50% cover for two stories. So you can work out the saleable area, you can run some numbers as to what you think that's worth from a retail point of view and from a build point of view without actually drawing a floor plan.

If you're going into medium rise and high rise units, the constraint that most often is the limiting factor is car parking. So if I'm looking at a site like that and I'm holding myself to a proper discipline, I would actually get an architect to actually cad draw the basement. Sketch plans are fine, but it doesn't address thicknesses of walls. It doesn't address services. You can catch yourself out. Two or three car parks could cost you one or two units.

So the discipline I adopt is that I will get a formal town planning advice and pay for it, and I will also pay an architect to properly cad draw the basement and actually run a concept for the building. And then from there, when I build my feasibility, I can actually build it off those designs. It takes more money, more time, more discipline, but it does allow you to get a much more accurate feasibility.

Andrew:: Okay. So, in your experience, in recent experience, let's just talk the last five years or so. Paul, what sort of loan to value ratios have banks provided construction finance to you for and have they got a benchmark rate of return that they like to see a margin in a property development before they'll lend that LVR?

Paul:: Yeah. So in real simple terms, your starting point is 20% margin. So you add up your total development cost, and then there has to be a 20% markup on that for the project to be feasible. The banks have a bunch of rules, but essentially they will lend you 80% of hard cost or 65% of gross realization, which is the total value of sales, whichever is the lesser.

Andrew:: I'm just thinking through that, what you've just said there, how does that apply when you extrapolate the timeframes for completion of development, like 20% margin on a one year deal is certainly a lot different to a 20% if it takes you two years to build something.

Paul:: Okay. So I said the starting point was 20. So then what you then need to do is adjust that according to the deal. The towers that are running in the market now, the higher density ones, they're not even five year deals, they're eight year deals. From concept all the way through to settlement and completion. There could be multiple towers. So the margins have to be higher to build that contingency.

So if you set a hard and fast rule, let's start with 20 and work your way from there. If it was a five year deal, I wouldn't really wanna be sitting at 20.

Andrew:: Okay. So can you tell us, have you got any experience dealing with private money partners as opposed to the big four banks or even in the middle there like second tier lending institutions, how do you see their different roles?

Paul:: Okay. So just, I'll just go one step back from that in terms of timing. One of the components of your feasibility is your interest. And generally when we price interest, we price it as capitalized interest. So when you run your feasibility, you are calculating the interest cost for the term of the development until it's complete and ready for settlement. So that's how you deal with the duration and the cost of interest.

In terms of funding, let's say the big four banks or what we would call senior debt. That's the component of debt that hits that 80% of costs, 65% of GRV. That senior debt you want at the lowest possible interest rate.

Andrew:: Okay. So another deal we got here, Archer Street, Bellingen. Paul, when was that deal? And can you tell us how it worked out?

Paul:: Yeah, so that was around 2015 or 16. My memory of being in business was that the haul out of GFC was really slow and very long and painful. When we started to look for a site around that 15, 16 mark, we started to see a bit of movement in the market.

Archer Street came up. The land value was within the parameters of what we wanted. It was an irregular shape block 'cause it had frontage to Archer, but a battle axe to Golden Road, which meant that the shape of the basement was tricky.

So we went to council and we negotiated a verbal deal to have one car space per two bedroom apartment, and there was 16 apartments. The DA process was six to eight months. It wasn't impact. It was a code accessible DA. Pretty much on the eve of the issuing of the DA, we got a call from the town planner who said that council have changed their mind in relation to the density of the car parking. It's gotta go back to the code accessible one is to 1.25. You either have to introduce more car parks or you're gonna get a refusal.

So that happened literally, we were ready for construction. The deal was packaged. We had all the sales team ready to go, and that hit us like at the 11th hour.

Andrew:: I remember I built a rooming house in Southport above my old office. Um, eight bedrooms. Eight bathrooms. And before I pressed a button, I spoke to my town planner. He said, Andrew, I've had a meeting, I chat on the phone to the council and they said they're gonna give you x amount of infrastructure charge credits because you're changing an existing office into some residential rooming accommodations. So they're gonna apply a whole heap of credits and you're gonna have to pay hardly anything in infrastructure charges. And I specifically remember thinking, I don't trust anyone. I said, Phil, can you get that in writing? And took me about three phone calls to him. Oh, have you got that in writing in an email from the council yet? Oh, no, Andrew, I'll chase him up. It was only when I got that in writing that I actually pressed the button and went ahead.

I wonder, in that case, could the listeners maybe learn that? Should someone have asked that person in your pre lodgement meeting to send you an email confirming won only one car park?

Paul:: They won't. They wouldn't do it. What they say is that with those meetings, they'll have a discussion around the general requirements. They'll point you out to the different traits or the characteristics they look at. But the pre lodgement is not an approval. And they're quite particular about what they will and won't put. If you look at the minutes of any pre lodgement, it's a discussion around the indicia.

So you're not gonna get it in writing until you get the DA.

Andrew:: So that curve ball, you know, that's something that you can't control. But what's the lesson there?

Paul:: We tore up margin. We had to effectively dig a basement to house the underrun, and we had to raise the building to allow for the overrun. Plus we had to buy the stackers themselves. So yeah, it took a decent chunk of the margin out of the deal.

But at the time, we could see that the market was lifting. We'd just come out of a five, six year post GFC period. So we took the view that because everything was set, we had our pre-sales, we could just turn the deal over, make a bit less margin and move on to the next. We weren't super confident that the market would continue to go. So at the time my business partner and I didn't want to take on any additional risk. We were happy to discount margin and just move through and work on getting through it and moving on to the next deal.

Andrew:: Okay. Fantastic. The next one we've got on the list here is Burley Heads. Yep. Tell us about the deal, Paul.

Paul:: Yeah, that's another one with really fond memories. It's a really beautiful building. Esplanade, Burley Heads, super proud of it. It still looks amazing today. Had some really good business partners in there. Um, yeah, I got to put some really good design into the building as far as not just the aesthetic, but the actual quality of the structure of the waterproofing and so on.

The interesting thing with that deal is that we went for code accessible, which meant 50% cover over four floors. There were other developers at the time that were going for 45% cover over 10 floors, and were doing it. So there was an opportunity to get really significant uplift on the site. The partners we had at the time were intent on keeping the stock. We were selling some, keeping some. The scale of the building we were doing meant that we could have a really quick turnaround.

We could have got a six month DA, 12 month build and built really beautiful apartments. We were happy with. If we'd have gone impact, there would've been a little bit more time in the DA, but it would've meant that the significantly larger building would've meant way more debt funding and a far bigger position in the market, which was probably beyond the capacity of the group that were involved.

So we opted for a smaller deal that we could control, that we could turn over quickly, as opposed to a bigger deal, which would've meant borrowings that would've made all of us uncomfortable.

As it turns out, the building was finished about July, August. And GFC was in the public space around that sort of December, January period. I think Kevin Rudd was elected about sort of September, October, somewhere around there. We were fortunate that we were able to get all our settlements and quit all the debt before the ramifications of GFC hit. Had we have gone for the bigger deal, obviously you wouldn't have known at the time, and it's just sheer luck or chance. But we would've spanned that GFC period. And with that significant debt, it probably would've had the potential to wipe us out.

Andrew:: The final deal wasn't so good, Paul, but I love talking about deals that don't go to plan because we've all had bad deals before, whether investments or developments. So Broken Head Road, Suffolk Park. Tell us about this disaster.

Paul:: Um, yeah, that was, I'm glad you're smiling about it too. That's great. It was pretty challenging. That one. Um, yeah. So, uh, Byron Shire, New South Wales. We ended up with six houses on a lot. The as-of-right zoning was for 49 bedrooms, and we ended up with 18.

The issue there was I think the DA was something like six years. Then by the time we got the construction certificate to build, we then had to do a civil subdivision to create the lots. Getting that approved through council took another year. That's after it was built. Then there was the build process. Yeah. That was a case of being held up in bureaucracy.

And I'm not — there were different layers of — the bushfire regulations are quite strict. There was some bush fires in Canberra that led to a tightening of the requirements. This particular lot was subject to that and the width of it added challenges, which then had to be designed into the fire ratings of the buildings. There was a sensitive tree on the site. So, you know, there was surveys of individual trees. It just, it just took a long time and the market was pretty flat that whole period. So we had our money in the deal. We were just continually sinking funds into consultancy fees.

And by the time we finally got through the deal, it was a case of hoping to get your money back rather than making any profit. And it also hamstrung us because your money's tied up in that deal, which meant that you couldn't look at any other opportunities.

Andrew:: So are there any other lessons that you can learn outta that one, like nine years of frustration?

Paul:: I think in hindsight, I probably should have done more research. In terms of, that was my only deal I'd done in that council. So I hadn't had the experience with those different requirements. My experience has been more Gold Coast. I haven't had a lot of experience in Tweed.

So I guess the lesson is that just because something works somewhere, it's not gonna work everywhere. Your council, know your consultants. Like we've built relationships with different architects, town planners. Civil, structural, all the different types of engineering disciplines. If I need to make a phone call and get proper advice, I know I can get it. And I know it's advice that's of value.

The development on the Gold Coast is probably less controversial than developments in other areas. You know, we are pushing up high rises. We've got huge population growth. As much as people are against what's going on, there's a general acceptance that that's what's gonna happen. So definitely yes, the Gold Coast market is, I would say, easier. But the lesson is you need to know your market and you need that team.

Andrew:: So developers that might be listening to the podcast. Paul, what do you think the biggest mistakes that they might make doing feasibilities is, and what do you have for advice?

Paul:: Um, I guess a few points. Firstly what I would say is that over the years when I've been trying to acquire sites, I do go through a lot of sites. I might succeed at one outta 50, one out of a hundred. Because I've done a few projects, I've got a rough set of rules around how I do my feasibilities. If someone puts a site in front of me, I can run a basic set of numbers fairly quickly. So that might rule out a decent chunk of the sites if we have to go further down into investigation.

The first lesson is don't think you're gonna analyze three sites and pick up a deal. It's probably more like 50. A site that works for you may not work for somebody else, and a site that works for somebody else is not gonna work for you.

The other thing I'll say is that you live and die by your feasibility. So it's a forecast, a projection of what you think's gonna happen in the future. There's a bunch of numbers in there. There has to be some data that goes into those numbers. You've gotta do your research and you've gotta support those figures.

Real basic rule. There's three numbers that matter. That's the land price, the build price, and the sale price of the apartments. Those three numbers are gonna have the biggest impact on the deal. The easiest number to get right is the land price. You're gonna get that within the contract. That's pretty clear.

The build price is the second easiest number to calculate because with even a basic sketch from an architect, you're gonna have it plus or minus a few percent.

The revenue's got enormous amount of play in it. And you can put numbers into a spreadsheet that work.

Most developers are incredibly strong at one, if not two of those three disciplines. Every single developer I've dealt with, they're incredibly hardworking, disciplined. They know their markets, they know their products, and they put the time and effort into those numbers. It's not by chance.

Andrew:: Paul Younan, thank you for your time, your experience, your wisdom, your education. For the audience, thank you for joining the podcast.

Paul:: Yeah, thank you. It's been a pleasure chatting.

Andrew:: Thanks, Paul. Thanks viewers. Uh, please, uh, if you haven't subscribed yet to the podcast, please do so and also forward this podcast onto anyone else you think might be interested. See you in the next one.

Thanks for listening to the Andrew Wright Property podcast. This is all about building a community of like-minded investors who can share real life stories, experiences, and collaborate with a view to helping each other join us. Get in touch through the link in the show notes. I look forward to you joining me on the next episode.