Feet On The Street – The Latest 10/28
Post-COVID-19 Strategy: Aim Low
Content for this edition of “Feet on the Street” comes from an interview with Mr. Kam Takhar, a good friend, terrific client and principal of Crowne Development, Inc. — a leading homebuilder located in Yuba City, California. As always, we hope you enjoy!
For nearly seven years, we have had the pleasure of providing inspection and fund control services to every residential project that Kam and Kal Takhar have built in the greater Sacramento market.
When I call Kam, regardless of the reason, I know that two things will happen. First, he’ll yell, “Show me the money!” straight out of the movie “Jerry Maguire,” and second, I will leave the call having learned something valuable.
With two successful and opposing projects in full swing, the strategies behind them are as diverse as the homes.
Heartland is located in Winters, California, a city in rural Yolo County and the Western Sacramento Valley. This 110-unit single family, move-up project shattered price barriers. Banking on pent-up demand and a less than 30-minute commute to neighboring Davis, California (whose population is 10 times that of Winters), Heartland has seen stellar absorption rates that far exceeded both pro forma and a moderately skeptical construction lender’s expectations.
Ridge View, located in Oroville, California, is a 70-unit project targeting the entry-level homebuyer. In 2019, when the market became quite frothy, Kam and Kal shifted their strategy to the most underserved market sector. A combination of buying finished lots that had been sitting for years, tracking a publicly traded homebuilder finish-up in a similar, neighboring project, and the additional pent-up demand resulting from the heartbreaking Camp Fire in Paradise, California (only 20 miles away), led them to move on well-designed, single-story floor plans that can be built and delivered in just four months. The beauty of this project is that it targets both the first-time buyers who are currently renting and the retirees who are downsizing and buying their last home. It’s the largest and most diversified buyer group. “First-time buyers represent about 31% of the market,” says Lawrence Yun, chief economist for the National Associate of Realtors®.
Since opening, sales have been extraordinary, demonstrating that these pre-COVID project strategies were extremely successful.
Feet on the Street asked Kam about the future and Crowne Communities’ strategy for tomorrow’s projects.
“Our strategy hasn’t changed from six to 12 months ago. It’s all about exit strategy,” said Takhar.
Kam emphasized, “Mentally, when you underwrite a deal, exit strategy is primal. You must ask yourself, in the worst-case scenario, are you going to be happy if you have to deliver a project and walk away with only your equity?”
Crowne’s 2019 strategy shift to the entry level market remains at the forefront.
“When we underwrote Oroville, we analyzed R-1 (single family) versus R-3 (multi-family).” This was Crowne’s first project in the “City of Gold,” and the Takhars wanted to be sure they were making the best business decision with the best information possible.
It’s all about structure, and you have to get in front of them.
In our previous career as homebuilders, an equity partner made a statement that I never forgot: “Building houses is just a glorified way of selling lots.”
The message is: the money is in the land. By entitling and subdividing land into buildable lots, the value increases. Building costs are fixed, and while you can hopefully make a profit on options and upgrades, the key to a project’s financial success is the land purchase and structure.
Structuring land purchase and sale agreements is where Kam truly shines.
He’s adamant, and states: “It’s all about structure, and you have to get in front of them.” His deals are never done over the phone. Kam insists on meeting with the land seller. That’s the time to share a project’s vision and propose deal terms. At the meeting, and unlike most other buyers’ approaches, the land seller is presented with a complete package, including market study reports, floor plan schematics, project pro forma, financials and past Crowne Communities projects.
In the Winters tract, Kam structured a cost sharing agreement with another adjacent and competing homebuilder to complete the required infrastructure improvements. Not only was he successful in executing, he also financed some of the improvements and was able to bring his product to market months ahead of his competitor, resulting in a huge sales advantage.
Looking forward to 2021
As the saying goes, location, location, location is, and continues to be, a key strategy in future acquisitions. “We’re bullish on Butte County, locations that have been impacted by fires and understanding that people want to live closer to town,” said Takhar.
Kam and Kal are focused on the lower end of the price spectrum, incorporating a mix of lot sizes and product types, attracting multiple buyers to a single location.
Regarding operations, they are never satisfied with past or current achievements. “The team gets better every day.”
“You can’t get drunk on success,” said Kam emphatically.
The company is experienced and has been successful in the acquisition, development, construction, management and sale of single-family home communities. Since inception, Crowne Development, Inc. has completed several residential developments and has completed construction of nearly 1,000 single-family homes within the local market area. Their success has been accomplished through careful strategic land acquisition, innovative community and home designs, quality construction and effective marketing. As a result, Takhar Development (the original name of the general partnership) was named the fifth most successful minority-owned business in the United States by “Entrepreneur Magazine” in February 1999.
Concrete’s now hard and hardening on everyone.
“I’ve lost six weeks in the past six weeks,” said veteran Superintendent Hayden Rayney.
We’ve known Hayden for years, and he doesn’t lose six minutes on his construction schedules. He’s the best in the business and expertly builds and delivers multiple phases of tract houses in his sleep.
It all started with, you guessed it, COVID-19. Infections went up, and concrete plants went down. Employees stayed home and found themselves making more money than working. No one was in a rush to return. Fast forward, the extra $600 per week ran out, and then workers returned to their jobs.
Not long thereafter, when the mud started flowing again, concrete contractor crews got hit with the virus. One guy tests positive, and the entire crew is out for two weeks. In a matter of days, 50-man crews were down to 10 men, an 80% reduction.
The demand did not change, but the allocations sure did.
A-tier customers, those who order 500-plus yards, were first in line. For perspective, that’s 50 trucks worth of mud. The average wait time for orders less than 500 yards: 10 days.
Then, as pent-up demand builds to extraordinarily high levels, the stress on the plant’s machinery breaks, and some plants go down, further constraining an already choked supply chain.
Feet on the Street learned a concrete ready-mix company went to a supplier plant to purchase powder to fulfill their orders. Three hundred trucks were dispatched, only 100 trucks returned full. They were banking on 3,000 yards and received 1,000 yards, or one third the materials that were promised.
During this time, prices increased $5.00 per yard, and then another $5.00 per yard increase hit the market right behind it. Since August 1, 2020, concrete is up $18.00 per yard and is quickly approaching a record $100 per yard.
“I’m doing now what I swore I would never do again,” said Hayden in a defiant tone. “I’ve got flooring in houses with no flatwork. I’ve got landscaping installed with no flatwork. I’ll get a crew one day and then won’t come back for another five days”.
Without this critical and final inspection-required improvement, Hayden and others are working blindly.
It is out of their control, despite their best efforts. “I’m delivering 13 houses next month and have people moving in. I’m doing everything I can to keep the job moving. The city is working with us the best they can, but I have a buyer who must be out of his current home next week and another with an interest rate lock that will expire soon,” he explained.
Hayden closed our conversation with this chilling statement: “I’m not a nervous guy. I’m nervous now.”
Deal structure: affordability and first-time buyer land deals
Concrete: rising prices and falling availability
Thank you Kam and Hayden. We are truly grateful for your time and help in sharing your insights with our industry.