Ian Jones Real Estate Developer President of Bgigroup; Development is a Bit Like War planning
The number of Americans 65 and older will increase from 47.8 million in 2015 to 79.2 million by 2035, due to the emergence of Baby Boomers into the age of retirement. Such a vast increase only creates a greater demand for Senior Living Facilities.
Hanh Brown: Today, my guest is Boone Nerren. Boone is a Real Estate Developer and has constructed, developed, and completed 5 full cycles of Senior Housing Communities. Boone helps investors find opportunities outside of the stock market that provides double-digit returns with minimized risk. He is the president of the AMZ Equity Partners. As an independent investment company, AMZ is free of being bound to a limited set of offerings provided by any one company. This allows Boone to identify and offer the best available projects in multiple investment categories.
Hanh Brown: Good morning Boone, good to have you here, how are you doing?
Boone Nerren: Hi, I’m good. How are you doing?
Hanh Brown: Thank you for your time to be here and sharing with us your story.
Boone Nerren: I’m happy to do it. So thank you for the invitation.
Hanh Brown: The last time we spoke, you and your wife were getting ready to visit your college kids between Oklahoma State and University of Texas. How was your trip?
Boone Nerren: We split the trip into two parts because we had my wife and son go up, our other son needed to stay home and work. And then this weekend I am connecting with my daughter for the father’s half of the trip, which will be an Austin because her school, Oklahoma state plays a, the University of Texas this weekend. She wanted to go to Austin. So this weekend is my weekend. So two weekends ago was my wife’s weekend with her.
Hanh Brown: It is that time of the year that we move our college kids back, enjoy some college football games with them. How is the family doing?
Boone Nerren: Our son is taking kind of a gap semester. He wants to switch to the University of Arkansas and he’s taken a couple of classes at the community college and working to build his own funds back up cause he likes, well, he likes to have you know, and we’re happy to provide room and board. We don’t pay for concert tickets and road trips and, and other more frivolous items. And so he’s saving up, they’re his own money and he’s way ahead on his hours. So he’s in good shape to, to make that switch. So he’s staying with us at least this semester.
Hanh Brown: It is nice to have them near because soon enough upon graduation, their jobs may take them to another state.
Boone Nerren: We’re happy to have it because we know we’re not going to have our daughter around much more at all. She’ll, she’s graduating with a, a, a special needs therapy degree and she will be off working and living somewhere other than home fairly quickly. So her degrees and they hide the man filled. And so we think she’ll probably be relocating here fairly quickly, but so we cherish the time we’d have when we get them. And if we’ve got our son for an extra semester. Looks Great.
Hanh Brown: Please share us your journey on how you got started in the senior housing industry.
Boone Nerren: Yes. I have been investing in real estate for about 10 or 12 years at the time. I’m an ambassador at the North Dallas Chamber of Commerce. Approached me and said he had a gentleman
Boone Nerren: who owned some land and it was part of the legacy family for a master plant and development out in northeast Texas. And they had some land remaining and they wanted to find a development group to build the senior living community there. And they felt that that was kind of the missing piece to their overall master community. And so we began a conversation and I had not previously done anything in senior living. So I began to just kind of searched through my contacts and, and get referrals from a couple of developers that I knew and put together an initial team to have a consultation. And it led to what proved to be a feasible project. And so from seven years ago to today, we’re bringing projects three full four and five along.
Hanh Brown: Congratulations! Networking, building a team of strong individuals, to take a project from conception to its full fruition, is huge and is a blessing. So, tell us about your recent development.
Boone Nerren: Yes. a land broker, a commercial broker that I know knew of this interest several years ago that was developing in senior living and say the found the site, it was actually tagged as a potential for senior living. The owner had a group that, that initially looked at it and did some preliminary pre development effort on it and site planning and market study and showed that there was feasibility for senior living community. But this was 2014 and the recession was still, we were still coming out of it in the commercial world and they couldn’t pull it together at that time. So it’s up there. And then I was introduced to it and what down, take a look at it. And from there it just progressed to purchasing the land and everything continued to proof up in terms of its feasibility market, the man pricing, construction costs. And so we began the project in 2017. We completed it and 2019. And we’ve been, we’re not all on Lisa mode. Project was opened in May and now here in September, we’re about 35% lease stuff with the expectation that early 2020, we’ll be cashflow positive and begin making distributions.
Hanh Brown: Do you have an institutional operator to run the facility and do everything from marketing and lease up.
Boone Nerren: Yes. and what is commonly done in this level of facility? There’s an 84 a room facility with the assisted living and memory care is that you have a recognized institutional operator run the facility and that’s everything from marketing and lease up through resident services from top to bottom that I do all of the service and effort on the operations. And so that company, he has a very robust marketing effort, can plan and strategy that they implement to get that Lisa done as soon as possible.
Hanh Brown: What is your role in the development and to what capacity do you participate in the project?
Boone Nerren: Well, I’m on the development and sponsor side. Oftentimes things are very fee Evie and feed based and sponsors are out trying to put together the bill and have a promote fee and other things that are there. And, and every development project I’m aware of or at least 98% of them have that structure to them, but I’m in first hand with the capital. So the first check that’s written is typically out of my bank account. And then I continue to capitalize the seed money to see if the project is feasible. So the first money in it, my own money and then secondly I’ll serve as the guarantor it, so that ties me to the project from beginning all the way through the end, which on our project that opened in May, I’m in asset management mode because I’ve still got a sizable guarantor liability that is assigned to me. That doesn’t go away until we sell it profitably. So I am obviously very highly motivated from start to finish to complete the project as successfully as possible. And not all developers or sponsors have that level of commitment and participation in a project.
Locate and negotiate the purchase of the property.Perform initial legal and tax diligence. Obtaining bank financing.Manage the affairs of the partnership. Arrange for management of the property. Communicate with the investors. Make day to-day operating decisions, and Negotiate the final disposition of the property.
Boone Nerren: Yes. Yeah. So the. Now it might not end up being a significant amount of the capital when you combine everything that’s done because this project we opened in May,
Boone Nerren: The villages of Windcrest in Fredericksburg, Texas. I was a 21 and a half million dollar project and we did get a 70, 30 at an equity, but that’s still, that was still about 6.3 million in equity. Well, my portion of the equity was about the 0.3. And then institutionally, once we got it put together we had a senior equity company that brought in the lion’s share of the equity. So I don’t want to miss represent that. I’m basically funding that all myself. But all the initial seed capital is something I’ve put the on and bring together. And then at the appropriate time we’ll begin the conversations with senior equity sources and bring them in to participate in the project.
Hanh Brown: What make your team so successful?
Boone Nerren: You know, it’s a group of proven industry leaders. So the one thing I knew when I had started in senior living is that I knew nothing and I needed to surround myself with people who did and experts. And so I sought out not just the cheapest or friends of friends, referrals, but those who were recognized in the industry as industry leaders. We have selected the two the letter d and number two architects as our design architect firm they’re based in Dallas, have about 30 architects on their staff and focus almost exclusively on senior living. So they’ve developed a good reputation and have an excellent track record. And so we added them to the team. And from there, our GC is on a bid process each time. And so we don’t just award the contract before there’s even bidding on the GC.
Boone Nerren: So each project then goes through a GC bidding structure and oftentimes because of the nature and the geography, the, the GC changes when you’re building in central Texas or you’re building that in northeast Texas you’re often get a different sub base and a different GC that can bring better efficiencies to it. But we still have our gcs go through a, a strong vetting process. There is a requirement package that we send out to each of them and they must be bonded. They must be able to bond the project to ensure its completion. And they have to have certain track record and other metrics, staff things back out the support as well in order to qualify. And then from there we pick the one who can bring together the project, shows the greatest vision and a probability of delivering the project on time and on budget.
Boone Nerren: So the GC often changes. And then a sub is almost always local, right? Cause you’re using civils who know the terrain and who know the local city structure and know the ins and outs of local civil construction. So we often also have a different civil at each site, although we have used we have had repeat civils engineers on projects. But that’s another thing that we often ended up using someone local. And then the last piece of courses, spa, conserve and guarantors. And that’s what I bring to the table. And of course that’s consistent in each of them. So I will always serve as a sponsor and a guarantor to provide that commitment to the project as well as provide that skin in the game that you know, allows me to bring some value that hopefully gives investors confidence that I’ve got a lot to protect in the project and to make sure it comes together as successfully as possible from the early structuring and these early design phases all the way through construction. When the GC and the architect role law I’m still in the project and asset management mode is we work with the operations company to lease it up and then ultimately to sell it. So that keeps me in is really the one party that’s involved from the very beginning all the way through the end. And I’ve got contingent liability right up until we sell and make distributions.
Hanh Brown: Is your construction team a GP in the deal or are they a fee based?
Boone Nerren: That’s right. They’re fee based contractors. The architect is a fee based contractor, the operators, a fee based operator. So each of these are fee based components that do not have ownership. So the ownership is all split up amongst oh, the sponsor and then the any other early equity partner and you have a handful of investors who have participated with me or invested with me for over 10 years that liked to participate early on in and have a carried interest in the project as well. But the primary bulk of the ownership is senior equity. And when we drop in that part and have that commitment, we don’t bring our senior equity in until we close in the construction. So all the rest of the chase and seed capital, it’s necessary comes from the sponsor in and when we have it identified and shaped up and we have our permits and our construction drawings completed and we’re ready to break ground, that’s when we’ll bring in our senior equity piece. And so they have a shorter time in the project and they have greater surety of their money being protected because at this point it’s ready to go. The GC is bonded. The likelihood of the completion of the project is very strong. And so that helps bring more security to the senior equity capital that comes in.
Hanh Brown: Let’s touch on the financing; The type of financing is contingent to the level of experience of the team, operator, construction, and so forth. Did you work with a local bank?
Boone Nerren: We always include local banks in the process because they can be a very attractive source of financing and they have a lot of local interest in the community. And so become tied to the project in a way that’s, that we find is helpful. And of course the interest rates in all tend to be the lowest when you’re using a local bank. The, the blowers are agency loans. So if you can get a HUD or USPA or if it qualifies even now for the opportunities zone structuring, there’s debt agency and debt financing there, that’s even more attractive. Now, some of those have like an opportunities zone. You don’t maximize your full benefit until you held the project for 10 years. And of course at that point if you do that, you don’t have a capital gains when you sell it.
Boone Nerren: So that’s become a much more attractive way. And we are looking at using opportunities zones as we move forward. And this is just something that’s come together in the last couple of years. We also look at USB A and our smaller markets because a USBA will finance up to 10 million on construction on a project in a rural, well, our tertiary secondary market. And so that’s another track your source of financing. So it’s a combination of contacting all possible sources when a project’s identified and then seeing what comes to the top as the best, best option to utilize.
Hanh Brown: Local banks may move faster, do you need to build in 6-8-month process into your underwriting?
Boone Nerren: Yeah. And it’s on a local bank it’s not, I need to 120 day process on a agency loan, it’s six months, that eight month process. So yeah, those timings that have to be considered into that does, I guess add one more benefit to the local bank is that they can move a little faster. But you’ve got a six to eight month process already built into it. From the time you’re designing to selecting your full development team, to selecting your GC to doing valley value engineering and further refining your costs getting all of your construction drawings done, which is a two to three month process. You’ve already got that time built into it. So if you start your financing discussions early that typically falls into something that doesn’t delay the start of your project. C So it’s a planning and coordination effort from the beginning that you began shaping up your financing.
Hanh Brown: What is the availability of capital for such a project and in purchases of what you’re doing?
Boone Nerren: I haven’t crammed any lack of, of active financing options yet in this particular boom cycle. Now, as you know, when the recession financing becomes tight and constricted and harder to find in times when we are in a robust development and financing market, there is a lot of capital including the agencies and banks. When we’re in tighter economic conditions, then it’s more private money. So that limits the field cause you’re local banks and you hear a federal agencies may not be as available. And so private capital’s a little more expensive. Yes. Sometimes it can be quite a bit more expensive. So even in recessionary times you can still find capital, particularly if you’ve got a team or the track record. And I mean if you’re starting your first project financings a whole lot or difficult, so you’ve got some proven track record. Having been in the business for a while before and then having focused more recently on the senior living that’s created a story for me that has helped in attracting multiple financing opportunities.
Hanh Brown: The market you are developing, how is that occupancy rate relative to the national rate?
Boone Nerren: Look at the, pardon me?
Hanh Brown: Oh No. You said the one that you are leasing up, but it’s around 30 or 40% and within a nine months to a year you are looking to be at 90 plus. Well, what about the exist? Yeah. Existing senior housing in your market. What is the average accurate,
Boone Nerren: Yeah. The thing that I’ve found in the handful of these small markets I have gotten into so far and see that the occupancy is higher than the national average, the national average factors in New York and Chicago and Detroit, Dallas and Miami. And there tends to be a whole lot of overbuilding in those markets, which softens occupancy rates into the mid-eighties. Well, they can still be very attractive on a yield perspective, even in the mid-eighties. But in the smaller markets where there’s not overbuilding the demand continues to exceed the supply. And at least in the Texas markets I’ve looked at those occupancy in smaller markets have run in the mid-nineties.
Hanh Brown: What advantages the senior housing have over other types of real estate investments?
Boone Nerren: There’s two primary areas and it’s, it’s the two real strong reasons why I’ve moved from single family and multifamily and residential development investing to 90% being focused in senior living. And the first of those is that they, there’s a need based market and there really isn’t a outside of medical office, nursing and care and assisted living and memory care. There isn’t any other sector in commercial real estate that is driven by the need the tenant customer, resident, but obviously assisted living and memory care is need based. The second thing is the market that is coming to this is expanding rapidly as the baby boomers age. And so the aging is irreversible and it’s not dependent on any kind of market condition. As Americans get older and they’re 80 million in the baby boomers the front end of the baby boomers are now turning 73 this year. So for the next 18 years we’ve got this population explosion coming to the market. So now you’ve got an expanding number potential residents and it’s a need based market. And that’s two factors that are personally no other commercial real estate sector enjoys.
Hanh Brown: The baby boomer demographic have the highest disposable income that are financially equipped to pay for such a senior living style.
Boone Nerren: Yeah. The and I know I’d seen it a couple of weeks ago, it’s 200 and something thousand is now the average liquid asset retirement base that 80 plus year olds have to draw upon. So we’re not talking forties, 50s, 60s or 70s. 80 plus year olds have an average of 200 and something thousand. Well, if you are looking at 4,000 a month and 48,000 a year and you have over 200,000 plus yourself security, when you add those two together, you can actually stretch that asset base along with your social security payments where you can have six to 10 years rent payments. So that is longer than the average resident needs to stay in a facility because they don’t come again until they meet services. And so typically the length of stay is three years or less. Well, if they’re coming with their average asset mason or social security they can double or even more exceed that average length of stay with their resources. Now in the inner city areas in Detroit or Dallas or Austin, Austin, it can be six, seven, 8,000 per month. So that can chew up your your retirement portfolio quicker. But in the smaller markets we’re going into, we’re hitting the middle strata of America. And so we’re hitting that average affordability range. And that’s what we’re targeting with our facilities and with our marketing strategy.
Hanh Brown: Smart move to target the smaller markets, hitting the middle strata of America to capture that average affordability range.
What are some of your lessons learned over the years in senior housing development? WHAT happen to this?
Boone Nerren: The, you, you can’t start too early in your design process of really designing to the end result. And the end result is only achieved as the building’s completed. And then the state comes in and does its licensing process. So the state will come in and do life safety code checks. Then they check everything from the density of the light cans and the safety of those to the to the holes that are punched in the walls and for electric and plumbing. And how those are sealed back up. And so there’s a lot of additional inspections that the state does to certify a senior living community as fully licensed. And so you really need to begin from the start when you first sit down with an architect, even lay things out to began to plan with licensure in mind, not just the building of a cool looking facility and, and shaping up design features and all that. It’ll be attractive about literally beginning from the start with an idea on the end of, hey, this has gotta be built and constructed to meet state guidelines.
Hanh Brown: Absolutely. Working with a forward feedback mentality is key because ultimately you had to comply with the state. You want to bring them in from the very beginning to make sure all the requirements specification are integrated into the design/construction from the very get-go.
Boone Nerren: Exactly. Yes. So that’s one of the major takeaways because what they single family home or an apartment complex what’s the city gives you, your, you know, the inspector comes and gives you your green tag saying you’re open for business, you’re open for business. But in the senior living community, you still have to have the life safety check by the state and you can’t bring anyone in until they’ve certified your building as acceptable. So there is that additional layer and senior living that’s not present in a homes or multifamily complex.
Hanh Brown: Great advice! For someone who wants to enter into this industry, how do they get started and what to do fundamentally to be successful.
Boone Nerren: Well, I spent two years making contacts starting to read industry publications getting myself acquainted with the nomenclature, terms definitions of senior living because it has its own unique characteristics, just like a multifamily building wood from a retail building and would from a single family residential development. And each of them have their own terms, codes obstacles, planning, decision making that goes into it. And so from the very beginning, you need to get acquainted with your business and not just acquainted, but you need to get knowledgeable about whatever sector you’re entering into as an investor. Well before you can get into development. It took me five years to get into the development side of it. So it is, this is not, you know, you you can do a fix and flip single family home investing seminar in a weekend and you can learn a lot of what you need to do to go out and purchase a home the next weekend and fix it and flip it.
Boone Nerren: You, there is no such shortcut in becoming a developer. So do your homework. And then the second part is, is ties back in. What we talked about before is assemble the very best, most qualified, respected team of core components from the civil to the architect to the GC to the operator that you can find and assemble a great team. Get all your homework done and then track one or two projects as a sponsor or investor participant passively who will allow you to sit in on meetings, track the progress of the project and follow it through all the way from beginning to end. So it, it may be a bit disappointing to some who think, hey, I’d love to get into development came. It’s great. But there’s a lot to learn.
Hanh Brown: Absolutely! Along your journey, what are some challenges?
Boone Nerren: You know, it’s, each one comes up with its own challenges. You know one of the one to you can’t predict ahead of time. I mean, you play on or you have a backup and that’s why you do bonding, no projects. But we started with a GC on our Fredericksburg project that shortly after we selected them and began their corporate office announced that this would be their last senior living development and they were going into government and schools and a, in another direction. That of course made us very nervous. They assured us that our, our team would stay together through the completion of the project. But we ultimately decided to switch gcs because we saw personnel starting to leave their organization and go elsewhere because they wanted to stay in senior living. And not do government and schoolwork. And so we had to make a GC switch early on in our project and that was took an enormous amount of time and effort and coordination and negotiation to make all that work together to be suitable for the previous GC or the incoming GC and for ownership.
Boone Nerren: And that’s not something that would may ever repeat for me again. And so there are things that as much as you would lay out your general considerations for what could happen, there are things that will happen that you have to adjust to and that’s where the strength of the team, the sponsors, the development team is important. And being able to make these adjustments to make decisions and then follow through on them so that the project stays on track and it’s still successful. And there are no limit, just as any real estate investor will tell you if you’re even doing single family homes one home to the next as different situations. One ends up with plumbing and problems that you didn’t know until you got into it. Another one may have great plumbing and bad foundation. Another one may have other issues as you get into it. And so each home, each project has its own individual characteristics. You try and anticipate as many of those as you can and then the rest you just have to be ready for change when it comes.
Hanh Brown: Well said! Great advice for managing a development project and for managing a family.
Boone Nerren: And children, each child is different. I mean, our children, we have three in there. Every one of them, you know, if we applied the same parenting the same way, it wouldn’t be as effective from child one and child two or child three. And so you make adjustments. Yeah. You’re all overall planning how you’re going to approach them, each of them, and then you adjust accordingly for what each child responds to Beth.
Hanh Brown: How do you keep a positive attitude to help with stress management and can even improve your health.
Boone Nerren: Yes, yes. I I’m aware of that. I, I get teased all the time that I’m building these so that I can have a place to stay and my senior years, and I certainly hope I get a discount at Cimbar. I use my ownership. You get a discounted at some points. When I, when I have made I mentally in the industry I read something every day. I have a online publication. I have a, a, a printed publication that comes to me, senior housing news and I have their online version of that as well. And so those things keep me abreast of the changes and keep me abreast of new directions and challenges in the industry. And so that keeps me mentally fresh so that I’m staying on top of this particular sector and industry to the best I can. And then physically active. And so I’m I keep an eye on what I eat and drink and, and try and manage myself physically to stay healthy. Ah, having three kids certainly keeps a person active. And so now those are the things I do to kind of keep my mind as sharp as I can and to stay physically in shape.
Hanh Brown: How do you give back?
Boone Nerren: A couple of things? I do, I’ve got a mentee, a young man that I came to me last year, early last year and expressed an interest in the getting into real estate and development. And he had seen number of blogs and done some research online and watched a number of the folks that are highly regarded out there that have videos available. And he and I sit down and went through Q and a and I said, look, you have an interest. I will be happy to continue providing you some of my time. And so now a year and a half later he still is my mentor, Ian. And so I’m continuing to coach and educate them through his college years now in this because he wants to graduate with some form of real estate degree whether it’s construction management or development and development.
Boone Nerren: Not a degree plan as much, but he’s trying to keep an eye on that as much as he can. So I provide some time there for mentoring. And then I also even as a small company, I have a position that I have is for a paid internship. And so I will bring a, a either a recent college graduate or still college student and for either one or two semesters and or a period of time if they’re out of college for a year and provide them with a paid internship to participate the business, learn everything from organization and entity formation administration documents, storage tax matters, investor communications, and then, you know, the project itself. And so I’ll I have a paid internship that I provide.
Hanh Brown: I think you make a great teacher/mentor! Thank you so much for your time and to inspire so many. How do people get a hold of you?
Boone Nerren: They’re certainly welcome to call me. It’s, yeah, nope. It’s often a little time before, just like today will be leave a message and I’ll get back to you as soon as I can. And of course we can exchange contact information via email and my email address is pretty simple. Well we’ll start with the phone number two, one four seven, nine four, eight, seven, seven, seven. And the email address is boon, which is B o o n, e at [inaudible], a m Z as in Zachary, l l, C as in charlie.com. [email protected]
Hanh Brown: Great to talk to you, best to you and your family. Look forward to next time.
Joe Anfuso, Chief Financial Officer at MG Properties Group, a private real estate owned company operating about 20,000 units in west side of the United States. Joe is responsible for directing the financial and fiscal management of company Operations, including budgeting, treasury, tax, accounting, information technology, risk management and insurance. He joined us on the podcast to discuss what he’s teaching in college, opportunities for the up and coming real estate graduates, simple steps to learning real estate and how to read the pro forma like a story.
Kim Radaker Bays