Small lot development - Part 1

small lot development why I like it

Brokers and investors sometimes ask me why I am interested in small lot development.  Being small, it has a lot of inefficiencies and challenges.  And it is just not the sexiest project to work on.  So I want to share some of my thought process on why l like it, what it looks like, how it’s done, and some cool projects in a 5-part series.

Here is Part 1 - Why I like it?  Real estate development is a capital-heavy business.  Raising money is probably one of your biggest challenges.  I know a few seasoned private developers in NYC who still consider raising capital as a major hurdle in their projects.  Tesla co-founders Martin Eberhard and Marc Tarpenning chose to start with sports car roadster (a very small segment of the market) before sedans and SUVs because of limited funding they have. If you are starting, you have limited capital! Pursuing large development requires significant capital and raising money with limited track records is nearly impossible.  Small lot development usually requires a small amount of equity which can be ideal for 1) taking on multiple projects at the same time to diversify and reduce your risk, 2) allowing you to start on your first project when you just don’t have much money.  


Another consideration is time.  Bill Aulet in his book Disciplined Entrepreneurship emphasized how critically important time is to an entrepreneur.  Large development in NYC usually takes about 5-7 years from start to finish.  When you are starting, your time is just as valuable as capital.  Ideally, you want to work on projects with a short life-cycle (1-2 years) and try to build your track records quickly.  Nothing is easy when first starting, even with small projects.  Unlike in the tech startup world, where young founders are expected to fail the first couple of times and it’s considered OK.  In real estate, your first deal is the key to your future success.  So it’s very important to demonstrate that you can source and close on a deal and successfully execute your business plan and turn a profit (even a very small one) at the end of the project.  


Everything in NYC is very competitive in general.  Real estate development is no exception.  There are always people chasing the same deal that you are looking at.  Small lots being small are usually overlooked by established developers and institutional investors. So you might have a better chance to find deals with low enough price basis that turns into your advantage.  


Real estate development is a business where you find opportunities to create “value” and profit from it.  There are many ways to create value depending on the strategies (core, core+, value-add, opportunistic).  One of the reasons that I like small lots is that you can usually find available air rights to enlarge the existing building either vertically or horizontally.  That’s the value to be created.  Obviously, value here is relative.  If your basis acquiring the deal is too high, the value can diminish significantly regardless how well you execute the business plan.  You can find more on how to evaluate real estate development deals from my past post. 


Another reason I like small lots is its low risk profile.  There are so many things that can go wrong with real estate development, e.g. permit approval, material defect, schedule delay, cost overrun, loan extension, community opposition, challenging leasing condition, etc.  When you are starting, it’s best to take on as little risk as possible.  It means your profit may not be as high as you would want.  But if this is your first couple of projects, you will need to be laser focused on your objective of delivering a small but profitable (even just a little) project to build your track records.  Small lot will increase your chance of success!


Finally, small lot also offers a set of unique and compelling selling points, privacy and outdoor space.  Real estate is a cyclical industry with ups and downs.  Ideally you wish to finish the project and time your open house or showing when the market is up.  But it’s tough to time the market as we all know.  So you want your products so unique that are recession proof.  One classic example is the Sky Garage project in Chelsea.  The development offered such a unique amenity (park your car directly into your penthouse apartment) which made it one of the highest selling condos even in the depth of the last recession.  By the same token, it’s not so easy to find a place with a lot of privacy and outdoor spaces at an affordable price point in NYC.  Small lot development usually ends up with townhouses or boutique buildings with floor-through units that have balcony, backyard or roof terrace.  It really offers a set of features that are hard to find in a residential market flooded with communal amenities that lack privacy and outdoor spaces dedicated to each unit. 


Small lot development is not easy but it’s probably your best bet to build a solid foundation for a promising future in the business. 

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