Risk appetite in the development game
development

Risk appetite in the development game

Risk appetite in the development game

by Demii Kalavritinos | February 12, 2018

We’ve said it many times: doing your research before entering the property market is vital to your success, and it’s no different in the development game.

Eric Brown, Investor

Regular guest Eric Brown chats to Phil Tarrant on the recent challenges he has faced with his warehouse purchase, recapping the previous podcast.

Eric reveals the financial and regulatory hurdles he had to overcome,  the stresses of purchasing a warehouse and how it changed his life, the back and forth with Council and banking red tape as well as his unbroken passion despite the difficulty.

They will also provide key advice for the listeners facing similar challenges and anyone considering entering the development game.

You’ll hear all of this and much, much more in this episode of The Smart Property Investment Show!

 

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: Facebook, Twitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

SUBURBS MENTIONED IN THIS EPISODE:

Sydney
Lilyfield
Balmain
Rozelle
Leichardt

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Announcer:    Welcome to the Smart Property Investment Show with your host Phil Tarrant.

Phillip Tarrant:         Hi everyone. It's Phil Tarrant here, host of the Smart Property Investment Show. Thanks for joining us today. A semi regular episode we've been doing with an investor and a fan I hope of smartpropertyinvestment.com.au and the Smart Property Investment Show.

            A guy called Eric Brown. If you haven't tuned into what this guy's been saying beforehand, we've been following him on a bit of a journey. He's hoping to develop a warehouse within the inner suburbs of Sydney, a suburb called Lilyfield.

            For those of you who are familiar with Lilyfield, it's pretty much next to Balmain, but on the other side of Victoria Road. Not as popular as Balmain and or Rozelle, but the creep is moving to that area, and it's becoming a very attractive suburb for both investors and owner occupiers. Very family centric, only a handful of kilometres from the CBD, very liberal area.

            We last spoke with Eric on the 27th of November 2017, so about two and a bit months ago. We've been following Eric's journey over a number of months now from the acquisition of this particular asset detailing his plans, what he hopes to do with it.

            At the Smart Properties Investment Show we've just been joining him along the way to reflect and analyse and challenge some of the actions and activities he has undertaken, but also share most importantly with our listeners of the Smart Property Investment Show just how hard it is sometimes to get this stuff done. A lot of stress, a lot of challenges. Potential upsides are huge, but good commercial gains, i.e., capital value gains, doesn't come easy. That needs to be offset with a level of pain associated with it.

            Eric, last time was saw you or spoke to you 27th of November as I mentioned a couple of months on, just before we get going with today's chat, status quo where we were back then at the end of November. I think you were just about to lodge your DA with Lockhart Counsel. So we get a recap from you today about how that is and where that is. And also just get into your head space to see how it's all going.

            How are you going by the way?

Eric Brown:   Well, I'm okay. I won't say I'm brilliant. I'm okay. 20/20 vision in hindsight is always a wonderful thing and easy to achieve. But unfortunately there's no crystal balling in today's world. Yeah. Under a bit of stress to be honest with you, Phil.

Phillip Tarrant:         Financial stress?

Eric Brown:   Financial stress.

Phillip Tarrant:         Yup.

Eric Brown:   And it's affecting all aspects of my life.

Phillip Tarrant:         That's not a good thing.

Eric Brown:   No, not a good thing. There is light at the end of the horizon. I'm still fairly confident that we're gonna get there. But yeah. It's gonna be real tough.

Phillip Tarrant:         Okay. I appreciate you coming on and sharing your journey. I think a lot of people over glamorise property investment. They think, they watch TV shows like The Block where they renovate run down houses or warehouses and turn them into these beautiful properties.

            Just anecdotally I saw I think it was that David Hughes bloke, that Melbourne comedian who bought one of these block properties. He was complaining about how overpriced it was when he purchased it. And the bank didn't value up the assets. He was way out of pocket.

            Anyway, buyer beware is what I'd say with that sort of thing. But this glamour of renovating or developing properties and turning them into something which is magical and wonderful and architecturally brilliant and beautiful to look at, it's not for the faint hearted. And you agree.

Eric Brown:   I think those shows got a lot to answer for, Phil. I'd say this to everyone who will listen to me, it's not all pretty. A lot of stuff gets edited out of there. I'm pretty sure they don't include all the finances costs, which is a huge burden on a potential developer. It's definitely not for the faint hearted.

            I'm in the game. I think I've got a bit of my head around it. It's not my first development, but gee whiz. Things often don't go to plan, and when they don't you've gotta make sure you've got a risk appetite for that. Because you watch your bank account going backwards and down and puts strain on all sorts of other aspects of your life.

Phillip Tarrant:         Risk reward, right?

Eric Brown:   Risk reward. Of course. Yeah.

Phillip Tarrant:         Yeah.

Eric Brown:   Without high risk you don't get your great reward. But you just gotta be ready for it I think. That's the whole message I'm trying to tell your listeners is just be ready.

Phillip Tarrant:         Okay. Just to recap for our listeners who're not familiar with your story. Obviously, you've been on the Smart Property Investment Show before sharing your journey through property investment, securing assets up in Queensland and some of the other stuff you've done in the past.

            What we've been concentrating on in this particular series of podcasts we're doing, and we'll follow you over the course of the year or two years as you develop this property. Status quo for our listeners. Could you just give us a quick snapshot of what this thing is, how much you paid for it, and what you intend to do with it?

Eric Brown:   Right. This is an oldish, probably 50 year old double story warehouse, timber warehouse, built on the boundary on three sides. The person that owned it before us started to do some work without council approval, so they got caught. They put it on the market. We went to speak to council about it, and council said that they'd support as long as we put in a DA for change of use, going from a commercial to a residential property.

            In theory there was no objections from council on behalf of doing the multi-residential unit development. Initially we were trying to push three through, three units on the block, which is adaptive use of the existing structure. We went to a pre DA meeting, and council advised us that it'd be better, our application to be seen as more favourable if we went back to two, which we did in subsequent. We submitted. Yeah.

            Unfortunately we got notified about four weeks ago that we got rejected. We'll move on to that a bit later, but we paid 1.73 for it. We also had all those financial, all the lending problems that we talked about in our last podcast that set us back.

            We're currently paying 10% interest, costing $8,700 a month just in holding costs. If you add that up since we purchased in June 2017, it's now $78,300 in interest we paid only. It's a massive burden.

Phillip Tarrant:         This is a cash flow right?

Eric Brown:   Cash flow burden yeah. The problem was we couldn't get finance because it was a commercial property didn't have DA approval for a conversion to a residential, even though in theory council said they wouldn't object to that, because of the zoning the land was in, which is multiunit residential.

Phillip Tarrant:         Okay. So a lot of moving parts for this particular property, and we'll try and break down for our listeners these things, which all happen in unison. And they're all reliant on each other. But you can't really advance until you get your ducks in a line and move forward.

            You purchased the property. You're transforming it from a commercial purpose to a residential purpose, i.e., you're gonna make a couple of townhouses or flats whatever you want to call them.

Eric Brown:   Correct.

Phillip Tarrant:         Transforming it from a commercial premises to a residential premises. Formerly I think you said it was some sort of smelter.

Eric Brown:   It was an aluminium window manufacturer.

Phillip Tarrant:         Aluminium window manufacturer. In the last podcast we talked about the treatments and tests you had to do to make sure the soil wasn't contaminated.

Eric Brown:   Yeah.

Phillip Tarrant:         There's a huge rigamarole, right?

Eric Brown:   Yes.

Phillip Tarrant:         To actually get to a point you put a DA in.

Eric Brown:   Absolutely.

Phillip Tarrant:         All these things you need to put a DA in.

Eric Brown:   Yeah.

Phillip Tarrant:         You paid 1.73 for it? Up until now it's cost you another 80 plus thousand dollars to hold that.

Eric Brown:   Just holding costs, yeah.

Phillip Tarrant:         Let's talk about the other costs that you've had to bear during this period of time. Does that holding cost include the borrowing fee that you paid? The one of-

Eric Brown:   No. That was an additional 3.3. Well, 1.1 plus a lending fee and 2.2 for a borrowing fee. So you've got to add $36,000 on top of that just to get the funding sorted originally.

            I just want to say that something really important for the listeners is we had pre approval prior to auction, written pre approval from a lender saying that if we were successful at this auction they would give us funding at 6% for a commercial line for this property. We extended the settlement period to 12 weeks thinking that was well and truly enough time to get this organised.

            Of course, the APRA stuff came in, and banks started tightening their lending policies. Six weeks to four weeks out from settlement we got notified that deal had fallen through and we needed to seek funding elsewhere. That's why we had to go to a different lender, more of a mezzanine style lending to get that approved. Otherwise, we would have lost our deposit, which was quite substantial.

Phillip Tarrant:         A lot of people feel as though written approval, formal, going formal alone means that you're guaranteed.

Eric Brown:   Pre-approval.

Phillip Tarrant:         Pre-approval.

Eric Brown:   Yeah.

Phillip Tarrant:         Sorry. What you're telling is that no. It's bullshit.

Eric Brown:   Yeah.

Phillip Tarrant:         They can pull it any time.

Eric Brown:   Yeah.

Phillip Tarrant:         Okay. That was a frantic chase for you to try and find those funds. And you've had to now secure finance at 10% rather than 6%.

Eric Brown:   Yeah.

Phillip Tarrant:         Okay. And you haven't even started building anything yet right?

Eric Brown:   Haven't even done anything.

Phillip Tarrant:         Okay.

Eric Brown:   That's 80 grand just sitting there, just waiting for this approval to come through.

Phillip Tarrant:         Holding costs up to this point, 80 grand plus other borrowing costs to get it set up. The facility, you're in for 120 grand just in finance right?

Eric Brown:   Yeah. Absolutely.

Phillip Tarrant:         Yeah. And you still need to hold this thing into the future until you get this thing built.

Eric Brown:   Absolutely.

Phillip Tarrant:         Okay.

Eric Brown:   Architect fees, I mean. I'm a big fan of partnering with professionals that compliment your weaknesses with their strengths and probably investment I guess you could call it. The architect, I think our fees pre DA were up to about 29,620. That's a lot of money, but I don't think people realise how much work it actually takes to get this stuff through. I would definitely recommend people go and see a good architect to get this kind of work done, because the value that they've added, even in the face of getting rejected, has been immense.

            I'm still confident that I've got the right people surrounding me. A town planner is another example. People that will back me into this fight. We're pretty confident that our arguments we're gonna put forward will get us across the line eventually. Then you've got to add the other costs of about $43,000 including surveys, council fees, engineering, contamination, flood reports, acoustic engineers, traffic consultants, basic town planners, insurance. Insurance was 5,300 for the property, because it was quite hard to insure for a year. They all add up.

            I'd be quite happy to give your listeners an Excel spreadsheet of that too, Phil. Not so they can take for face value what those costs are gonna be, but just so you've got some sort of awareness of what figures I've paid. Maybe it will give your listeners an idea if they are thinking about doing a development, what costs to factor in for their own benefit.

Phillip Tarrant:         Absolutely. We'll put that up for our listeners online when we do some stories around this particular podcast.

            This seems bloody expensive, right? And a lot of those costs, obviously insurance you have to have as a condition of having the finance. It's good to insure your properties anyway. A lot of those costs you spoke about were to build the case for you to submit a development application or DA with the council, which is Lockhart Council. So you've got to pay all this tuff anyway just to put the paperwork in for the bank, sorry, for the council to consider whether or not your plans are gonna satisfy their needs.

Eric Brown:   Yes.

Phillip Tarrant:         And then after that you get the fun bit of building all this thing right?

Eric Brown:   Yeah. Well, actually there's more to that. Because we got a rejection letter, we put ina Section 82-A, which is a challenge to council's decision on that matter. But along with that, we've had to revise a lot of paperwork and reports, et cetera, et cetera to support our argument. That's been a further $17,500 in terms of architect fees and design fees and consultant fees just to get to a point where we can now submit a Section 82-A, which is challenging council's decision.

            The way that works is it goes to a different office to assess the project originally. Then they review all the documentation again and decide whether the original council duty planner made the correct decision in that. From here I think our steps are we can go to a planning panel, which is an independent body of professionals and ex professionals that has complete authorization of whether that DA gets approved or not. And I think it's specific to Lockhart Council.

            You'd have to check your local municipality to make sure what they're doing. But that's our next step. The step beyond that is of course Land and Environmental Court.

Phillip Tarrant:         Okay. So you've still got some aces up your sleeve. But the stress of that's probably going to pan out. You just want to get building, right? You just want the approval from the council saying yes.

Eric Brown:   I want to get off the loan. I can't get off the loan until I got DA approval. That's the-

Phillip Tarrant:         So this is another thing. You're gonna have to spend more money in order to potentially get a development application approved?

Eric Brown:   Yeah.

Phillip Tarrant:         You outlined those steps they can go through all the way up until the Land and Environment Court. Sounds expensive. But if you put that within the filter of the context of this development, you're paying 10% interest right now. You want to shift that to a cheaper loan?

Eric Brown:   Yup.

Phillip Tarrant:         6%. But the only way you can secure finance is once you've got a development application.

Eric Brown:   Yeah. In theory, yeah.

Phillip Tarrant:         In theory. It's chicken and the egg, right?

Eric Brown:   Yeah. We've had to jump through a few little hoops with reborrowing against our principal place of residence to try to draw a few funds out of that to tip it in. Then mucking around with different scenarios to try and find that money from wherever we can, however we can. But yeah. Household budgeting is a new hip craze word in our household at the moment.

Phillip Tarrant:         You were eating baked beans and baked noodles.

Eric Brown:   Eating baked beans. Back to old school. Back to the Macquarie University days.

Phillip Tarrant:         Must be hard for you eating that cheap caviar rather than that fancy Russian stuff. Down to Passion Pop rather than Bollinger right?

Eric Brown:   Passion Pop. Not a bad drop there.

Phillip Tarrant:         Give him a hard time. Anyway. For our listeners, I actually know Eric quite well. I get away with that. That's the reason why I get him on the show and talk quite openly about his particular situation. I think it's important messages as we sort reiterated or alluded to.

            Development is not for the faint hearted. Getting a nice green field block and chucking a couple of town houses on it is one thing. Trying to redevelop an old warehouse in the city of Sydney is another thing altogether as well.

Eric Brown:   I'll just say, Phil. I haven't lost my passion for it though. I'm still excited, super excited about it. The stress is high but-

Phillip Tarrant:         It hasn't broken you yet?

Eric Brown:   Hasn't broken me yet.

Phillip Tarrant:         How far off being broken are you?

Eric Brown:   It depends when you ask me and how many cents I've got in my bank account when I look at it in the morning. Been pretty close a few times. You probably know that better than most. This week, this day, this hour, this minute, I'm not broken. I'm ready to keep fighting. I'm still confident that sanity will prevail.

Phillip Tarrant:         You bought it for 1.7. You spent all this money, holding costs. Then you gotta build your vision.

Eric Brown:   Yup.

Phillip Tarrant:         And we spoke about last time about what you expect this thing to be and how you're gonna undertake that build in terms of fixtures and fittings and the actual product you create.

Eric Brown:   Coolest warehouse in Sydney.

Phillip Tarrant:         There you go. That's your vision is it?

Eric Brown:   Yeah.

Phillip Tarrant:         Okay. And you're gonna hold onto this. Right? This is gonna be a generational asset.

Eric Brown:   Yeah. Generational asset. That's it. That's right.

Phillip Tarrant:         You're creating this to rent it out to professionals? I imagine that's the kind of people able to afford it.

Eric Brown:   Yup.

Phillip Tarrant:         Who want to live in the-

Eric Brown:   Young professionals.

Phillip Tarrant:         Young professionals.

Eric Brown:   You spoke about Balmain and Rozelle earlier. There is a shift toward Lilyfield, because Balmain and Rozelle typically very small blocks of land. You might get 154 square metres of land. When you start having children, and people that live in the Inner West love the Inner West so much, but it's really not enough space for most people to bring up their family.

            Of course as they push sideways and out into other suburbs, it's been going on in Lilyfield for quite a time. You can pick up blocks at 300 square metres. A bit more room. A bit more open space. The push is already happening. A lot of families are already moving from the suburbs, and from the East as well. The Eastern suburbs prices been going up for quite a while now. To some may seem unaffordable. They're looking for other alternate areas that are close to the city with good life style and good amenities.

Phillip Tarrant:         You're confident about the product you can create based on the fact that Leichardt council is happy for you to create this thing.

Eric Brown:   Yes.

Phillip Tarrant:         Okay. All right. We've handled that.

            You paid 1.7 for it. 120 grand in finance cost so far, plus all the other costs you've outlined. You're in for probably nearing 2 million bucks now. How much is it gonna cost you, once you get the green light. I'm gonna say once, not if, once. Eric. More positive thinking.

Eric Brown:   Yeah.

Phillip Tarrant:         Once you get the green light. How much money is it gonna take for you to build this product that you want to build? How much? And how long?

Eric Brown:   I reckon somewhere between 1 and 1.2, not including holding costs, finance cost. We could potentially capitalise the interest on that too if we chose to. But first thing is to get onto a good base rate, then we'll talk about how we're gonna finance the construction. Got some irons in the fire with that already.

            Positive that once I get it approved that finance of the construction loan won't be a problem. Of course, I'll have to use an independent builder for that. I'll have to have a building contract, and I'll have to have a DA approval. I can't go down that path until I'm in that pocket. Reckon somewhere between 12 and 18 months. Then you've got to add all the holding costs on top of that. Hopefully not at 10%.

Phillip Tarrant:         No. You'll hold it at six.

Eric Brown:   Yes.

Phillip Tarrant:         A lot more manageable right?

Eric Brown:   Yeah.

Phillip Tarrant:         Okay. You reckon all in, all done, barbecue, finishing the whole thing, landscaped, ready to go, for lease signs out the front and the first step in home, in for 3.5 million?

Eric Brown:   Yeah. Maybe a bit more if you add holding costs on. So maybe 3.6, 3.7?

Phillip Tarrant:         3.6, 3.7. Okay. What do you think the evaluation's gonna be at that point in time? And let's chat about that. What do you think the evaluation's gonna be? How did you determine what this evaluation's gonna be?

Eric Brown:   I reckon I'll get 2.4 for each of the two units. I'm consider that I will go to 2. I spoke to a lot of real estate agents and sales agents. The consensus is that we build two bigger, better ones. We'll get equivalent amount of money than building three smaller, two bedrooms. So we'll go for a three. For two three bedrooms, we'll get equivalent amount of money. It's less construction costs, 'cause I'll need one less bathroom in it.

Phillip Tarrant:         One less kitchen.

Eric Brown:   Two less. Two less bathrooms. One less kitchen. Et cetera. The construction costs will be cheaper. Real estate evaluation's in present market are based around 2.4 each.

Phillip Tarrant:         Okay.

Eric Brown:   And that's based on previous sales of warehouse conversions. There's not too many of them around, but they're generally pretty cool, what's the word for it? They're pretty funky. People want them. There's obviously a lot of interest. There's a scarcity factor around them. If you do it well enough, exposed beams, people just want to be in that type of space.

Phillip Tarrant:         It's the right area for it.

Eric Brown:   Yeah.

Phillip Tarrant:         Lilyfield. It's sort of consistent with the area and the attitude and the styles of who that want to live around there.

            Okay. 3.8 all in, with holding costs. And you're saying 2.4 each for the properties in evaluation. You're not selling them, right? So it's gonna be evaluation. You're looking at 4.8 in value.

Eric Brown:   Yeah.

Phillip Tarrant:         So-

Eric Brown:   And things haven't quite gone to plan. I say I'm lucky I had a bit of fat in that initial feasibility study, because if we were doing a tight fease right at the start, and we thought we were gonna make $200,000 out of this and then you get an extra $100,000 worth of interest cost and you get an extra $43,000 worth of engineering costs and other things the council's thrown on top, you're gone. You've blown it away.

            A message to the listeners is make sure you do have contingencies in your feasibility, because it's so easy for things to take longer than you think and different judgments to come out of bodies you never expected you'd get.

Phillip Tarrant:         As it sits right now, you reckon at a point in time when you finish it and you get evaluation on it, which sounds like it's probably two years away right?

Eric Brown:   Yup.

Phillip Tarrant:         Once you get DA and then build. That's about a million bucks.

Eric Brown:   Yeah.

Phillip Tarrant:         You're ahead of the game.

Eric Brown:   Yeah.

Phillip Tarrant:         A million bucks on nearly 5 million bucks. What is that? 20%? A little bit more than 20% 418. Worth it?

Eric Brown:   Oh yeah. It's a legacy, like I said. I'm providing something for my children, two boys, six and nine. If I can, I don't want to give it to them, but if I can teach them the value of a property at an early age and build something and create something I'm proud of and then hold it, it's part of my long term strategy too of passive income through residential property development.

Phillip Tarrant:         Okay. That's good. Let's shut up about that. We're talking about a specific project here. But this is kind of a monopoly right? This is one property-

Eric Brown:   Part of a bidder's game.

Phillip Tarrant:         Many other ones as well.

Eric Brown:   Yeah.

Phillip Tarrant:         Evaluation in two years time at 4.8 million, should that happen? Markets may change. Might be less. Markets might change. May go up. Who knows? You got to expect things not to be what you expect them to be. But as an asset to hold for long term in that part of Sydney, what is it kilometres from CBD?

Eric Brown:   Yeah. I can run there in 15 minutes.

Phillip Tarrant:         Okay.

Eric Brown:   Drive there in five and a half.

Phillip Tarrant:         You're not gonna go too wrong, right? You say hold on this thing. What would you rent it out at?

Eric Brown:   Somewhere between 1,200 and 1,400 a unit.

Phillip Tarrant:         Okay.

Eric Brown:   Currently.

Phillip Tarrant:         And with evaluation of 4.8 million, how much debt do you think you'll be carrying against that?

Eric Brown:   Uh-

Phillip Tarrant:         Depends.

Eric Brown:   That's an interesting question. It depends on who's asking, Phil. We'll probably shift debt around. That property, yeah. I'll move debt around a little bit.

Phillip Tarrant:         Yeah. So sometimes you might carry the debt on your principal place of residence if you have really good equity gains in your principal residence. I guess getting into mortgages for our listeners, sort of connected with this, but not so. It's more relevant to everyone. You can get pretty good rates against your principal place of residence unoccupied as a borrower of three, high three's right?

Eric Brown:   Yeah.

Phillip Tarrant:         Percents. Which is good. Look at some of my interest only mortgages from some banks, five plus percent on arrival. The money's a lot cheaper if you potentially load up the debt into your principal rates of residenc.e

Eric Brown:   Yeah.

Phillip Tarrant:         But that often flies in the face of what many people want to do. And the strategy, right or wrong, that they want to pay off their family home and have it unencumbered of debt completely. You gotta work out where and how you want to hold your debt.

Eric Brown:   Yeah. You'd have to also speak to your accountant about whether you could-

Phillip Tarrant:         Absolutely.

Eric Brown:   Transfer debt from an investment to your principal place of residence, or vice versa, because there's tax implications on that. I'm not telling you that's the answer, but-

Phillip Tarrant:         You can't claim debt reductions on your principal place of residence. I'm not a tax agent either, and just a quick one for our... yawn if you want. Just a preamble. We're only talking about general factors here. We're not giving-

Eric Brown:   Hypotheticals right?

Phillip Tarrant:         Any particular advice to anyone. You guys know the drills. This is just general information only. When it comes to that sort of stuff, you really need good, solid financial advice around it. Good broker, good accountant. Ask them the questions. Do the what if scenarios. It's good to explore them. There's pros and cons with every strategy. You know?

Eric Brown:   Yup.

Phillip Tarrant:         If you get cheaper debt somewhere and hold a property longer, maybe, maybe not. Outside my remit and skill set to even offer any observations on that.

            All right. This DA is, you've been rejected?

Eric Brown:   Yup.

Phillip Tarrant:         How did they reject you? A phone call or a letter?

Eric Brown:   Letter.

Phillip Tarrant:         How'd you feel when you got the rejection letter?

Eric Brown:   Bit angry really.

Phillip Tarrant:         Did you expect it?

Eric Brown:   No.

Phillip Tarrant:         Okay.

Eric Brown:   No. I was a bit angry when I read it, because some of the reasons they put in. Lack of privacy to private outdoor open spaces. I had a letter from my adjacent neighbour on the North side saying he supports the development 100%. Had a letter granting access from the neighbour on the South side saying they support the development. To me, if the neighbours on both sides supporting this development, who are council to say that it's negatively impacting their private, open space when clearly it's not?

            There's some other stuff they talked about, not providing an OSD, an on site storage detention for storm water. My engineers only gave me 14 days to respond by the way. So my engineers advised not enough time to put it together. But the realistic was we're taking away hard stand and putting in deep soil, planting for these private open spaces. So we're actually doing better for the environment. There's no plants at the moment. We're putting plants in. It's a moot point.

            And the council didn't kind of get our arguments about that. It's kind of frustrating, but I mean, they're doing their job. I think the best thing you can do instead of butting back with aggressive commentary on that is mould to what you think they're wanting from you in terms of when you do repeal that decision, which we've tried to do to the best of our ability and satisfy areas they think we weren't covered or under the LAP with that. Which we tried to do. No, disappointed yeah. But that's life really. You know?

Phillip Tarrant:         Did the councils ever approve a DA the first time?

Eric Brown:   Yeah, yeah.

Phillip Tarrant:         Yeah?

Eric Brown:   Lots of time. It's quite interesting to surf the net and look at what they do and don't approve.

Phillip Tarrant:         It's all out there.

Eric Brown:   It's kind of random. Yeah. It's everywhere. You can search, jump on a council website and look at it. Really interesting research too if you are doing a DA on something. Look for precedence that have been set before. Jump on those council websites. Search them through. Yeah. They keep them all. They're recorded. They're all live.

            The other frustrating thing for me, Phil, was we had pre approval in the pre DA section for adaptive reuse of this warehouse. When it came to their decision on the DA they rejected it based on the fact they believed their argument was that we weren't reusing existing structure, which I said is complete bull shit because we are.

            The structures, site coverage stays the same, the green space is obviously improved. The floor to space ration stays the same, albeit that was outside the EDP. We're not making any changes to it. My arguments were all I felt based pretty confidently about what was within the rules and regulations.

Phillip Tarrant:         Cool. Just for my listeners, I got my buyer's agent calling up right now. I thought maybe it'd be entertaining to pick it up right now on air. But I'll let that one go. The keeper.

Eric Brown:   Oh yeah? What's he got for you, Phil? Any tip me into?

Phillip Tarrant:         Maybe the listeners. Oh I missed it. Doesn't matter.

            You mentioned LAP. What's LAP again for our listeners?

Eric Brown:   It's like an environmental planning policy that the government sets. You've got your rules based around what you can and can't do in an area. It covers sight coverage and building heights and set backs from the boundary. All sorts of stuff really.

            It's a very, very large and comprehensive document that I have no idea. But that's why I employ competent professionals to guide me through that space.

Phillip Tarrant:         Just base on the basis then, and you mentioned that you're quite satisfied with the advice that you've been getting from these professionals who've supported you through this DA. It got rejected right? Do you feel as though you could have done a better job in creating this application to alleviate the point where you are right now?

Eric Brown:   I don't think so, because we went to a pre DA meeting. If I hadn't of-

Phillip Tarrant:         Pre DA meeting. Could you just explain that for our listeners?

Eric Brown:   Pre DA meeting is sounding council out prior to putting in a development application. You get to physically meet with the town planner, who's gonna assess the project. They often come to site and they walk you through the site. Then you tell them what your ideas are about the site and they say, look, same as we presented in that meeting. A set of three two-bedroom units.

            Council firstly pointed out that there was only parking for two. We wouldn't reach the LAP's parking restrictions. Then also had problems with visual privacy to the private outdoor open spaces. Their recommendation was to pull it back to two. They give you some concepts and they give you some feedback. When you do go to put your DA in, you've kind of got a feel for what council wants with the development.

Phillip Tarrant:         So you're not going in blind.

Eric Brown:   Not going in blind.

Phillip Tarrant:         Okay.

Eric Brown:   We thought we addressed every single issue. The surprise ball, the curve ball that came at us was when the council rejected the DA. Their commentary was you're better off knocking that down and building two cottage style fronted houses with your private open space at the back.

Phillip Tarrant:         So they're saying rip it all down and build something new.

Eric Brown:   Rip it all down. My argument is, you're supposed to be an environmentally sensible council. Why would you rip these beautiful timber, hardwood beams and bearers. They're fantastic. They're unreal. Why would you throw them in a landfill? Why would you rip them down and chuck it out? It's just illogical to me. It doesn't make sense.

Phillip Tarrant:         Illogical, illogical. These re the rules you play with right?

Eric Brown:   Yeah. If we can prove we're doing adaptive reuse, then I believe we've got a fairly strong argument, because most of council's rejection was based around they didn't believe we were complying with the adaptive reuse policy, which I think we're very, I'm very confident we can argue against that.

Phillip Tarrant:         All right. So you're gonna take this all away then?

Eric Brown:   Yeah. All the way. Home run man.

Phillip Tarrant:         Really.

Eric Brown:   Yeah.

Phillip Tarrant:         You sure? Why don't you just say, too hard. I'm out.

Eric Brown:   No.

Phillip Tarrant:         Sell it some other sap and let him deal with it. You know?

Eric Brown:   No. I'm a fighter, Phil.

Phillip Tarrant:         Really?

Eric Brown:   That's not me, mate.

Phillip Tarrant:         Would you potentially allow your, I don't know if I can say this, your pig headedness get in the way of rational smart decisions? Or do you think the fact that you're a fighter means that you get to the end? You know what I mean by that question?

Eric Brown:   Well I think I'm in it. The amount of money I've spent on it. I think it would be kind of silly to give up before. I'm a glass half full type of guy. I think it'd be silly of me to give up now on the chance that I wasn't gonna get approved.

Phillip Tarrant:         What's the percentage you're gonna get his time?

Eric Brown:   According to Eric Brown?

Phillip Tarrant:         Yeah.

Eric Brown:   100%.

Phillip Tarrant:         Okay.

Eric Brown:   100%.

Phillip Tarrant:         You've gotta back yourself. I think that's the right attitude. If you're all in, you've gotta go for it.

Eric Brown:   Right.

Phillip Tarrant:         'Cause if you start doubting yourself, you're probably gonna start making bad decision.

Eric Brown:   Say we get right to the end and we've been rejected again. We've spent all this money on it. The potential to sell it, with all this rejection stuff on top of the property is minimal, right? You're not gonna get someone, well, it's gonna be harder to get someone to come in and take it off our hands. So then your options are, what if we spend another 50 grand on Land and Environment Court? What if we spend another 100 grand in Land and Environment Court?

            We're actually still opening up the potential to make the money in the end. Our strategy may be if it got too stressful and my wife and I thought about having a really tie of it, maybe we could get the DA and off load it then if it was too much for us. But at the moment, in the current head space, we've still got capacity for it. Stresses and all.

Phillip Tarrant:         So this goes back to one of our original points is that it's bloody hard doing this stuff. If you haven't got the backbone for it, if you haven't got the mental strength for it, if you don't have the financial capability for it, if you don't have the expertise for it. Don't do it.

Eric Brown:   Well the expertise you can outsource expertise. There's a couple mobs running around. A friend of mine Neil is an outsource developer. You can hire expertise. That's easy.

Phillip Tarrant:         You should be doing it anyway.

Eric Brown:   You should be doing, yeah. I do that anyway even though I had experience with like our accounts particularly and with DAs and developments. I still hire the people I believe are the best for the job. And I don't mind paying good money for them.

Phillip Tarrant:         You're in the stretch right now with this. Most of the stress that appears, there's two bits of stress here. One is the financial stress to hold the property.

            Then the other components of the stress is shit, are were ever gonna get there to where I actually have to deal with the DA thing, right? So two different things right? Has there been any time where you've gone, no. That's it. Tomorrow I'm seeling it. It's gone. I'll speak to an agent. Have you ever doubted it that much where you've gone, that's it?

Eric Brown:   No. I've thought honestly about what other assets I could sell to make it work.

Phillip Tarrant:         Okay.

Eric Brown:   Other properties. I've thought about selling. Not part of my long term strategy, so it doesn't sit very well with me. But I think if it came down to it, Manny and I are quite prepared to go down that path if it came to it. It was quite a big mental hurdle to jump, because it was against everything we'd been planning for for the last ten years. We're doing something against the flow of the stream.

            Very difficult to try and mentally accept that decision, but we're both on it now. We're both accepting that if it drags on too long and we end up running out of money, then we'll sell another asset and carryon the fight. Some of the other development residential developments we've done, we've already made our money technically in the development. The yield is fantastic, and it's cash flow is good because of those properties, but we've already made that money on development. We'd be silly to sell out of a property that we hadn't extracted the most value out of and keep another one. That's our philosophy anyway.

Phillip Tarrant:         You've done, you've mentioned some stuff beforehand? You went into this knowing it would be hard. You went into this knowing it's probably gonna harder than the other stuff you've done. Did you think it would be this hard?

Eric Brown:   No.

Phillip Tarrant:         Okay.

Eric Brown:   No. I've done two developments in Lockhart Council. I kind of know the history that they are a difficult council to work for. Love you, Lockhart Council, but no. I didn't think it'd be this hard.

Phillip Tarrant:         What makes it-

Eric Brown:   The problem, there's two issues there. The problem is the getting approval. But the second problem is the finance. It's the underlying vortex that's sucking me under every single minute of the day when I'm spilling this money into this project.

            I think if I didn't have that financial strain, I'll be cruising through this. The fact the roads a bit lumpy and I've got this whirlpool underneath me sucking me down, which is just bleeding me dry in terms of funds really does amplify your risk.

Phillip Tarrant:         So two things happened. Number one, you gotta get a DA so you can get new finance facility. Or do you reckon you can sort of add finance facility before you get the DA?

Eric Brown:   Maybe. I won't reveal too much, but I got a couple of irons in the fire with a couple of good brokers. I've actually gone to two brokers on this. It's a race, a bit of competition to see who can deliver the product to start the best. If you're listening out there, brokers, you know who you are. I'm gonna make it work so I can tell Phil. I'm very excited. I want to tap him.

Phillip Tarrant:         Does the guy who gets you the finance get a bowl of grange? I know you've got plenty to sell him. Maybe you can just sell them, mate.

Eric Brown:   I'll give him one of yours.

Phillip Tarrant:         Yeah? Won't give my grange away. I don't have any grange. I'm a Passion Pop man through and through.

            All right. So you're working on that. The next step's in terms of getting your DA approved. You're putting more documentation into the council?

Eric Brown:   No we've done that. We've lodged a Section 82-A, which is a review of council decision. We're now on notification period, which goes for roughly two weeks. 13th of February to the 27th of February. It's been allocated to an officer who is in charge of that, which was different from the original town planner from the councils who made that decision to start with.

            Now neighbours and people in the suburbs can put in applications, put in submissions either supporting or not supporting the development application. Mind you, the last time we notified there was zero negatives and two positives.

Phillip Tarrant:         When you go around and try and cultivate some people to say yes, I think it's a great idea and I think Eric Brown's an absolute legend. Let him build his property.

Eric Brown:   I wouldn't cultivate it. I think being open and honest with your neighbours on either side of you's a really smart strategy right from the get go. 'Cause if you don't have them on board, it's-

Phillip Tarrant:         You mentioned though, say no.

Eric Brown:   It'd be another hurdle to jump a lot harder. I think being reasonable, sometimes is an anti development fear I guess that comes into neighbours. They may have thought I was gonna put a ten, 24 square metre boarding houses in their place, which potentially I could have.

            I'm not about trying to pull the money out of this development. I'm not about, I'm a local anyway. I live up the street. I'm not about trying to squeeze it for all it's worth. I want to create longevity, and it's part of my plan is that whole future programme of creating a beautiful asset that will last the test of time and provide an income stream for me years and years to come.

Phillip Tarrant:         I imagine your neighbours, rather than having, I've seen the property. You've showed me it. I'm not even gonna call it an ugly duckling, right? It's probably a little bit worse than that.

Eric Brown:   Yeah. It's worse than that. There's still a beer bong hanging off the fence, Phil.

Phillip Tarrant:         I imagine your neighbours actually want a nice looking property next door, because it probably helps-

Eric Brown:   Oh absolutely. They wrote that in their support letters, Phil.

Phillip Tarrant:         It's gonna lift the whole street up.

Eric Brown:   Yeah. It's open to vandalism at the moment. Every day I drive past there, I think is there a squatter living in there? It's kind of pretty disgusting. And to think that potential if I didn't get approval, cost wise would have had the funds to develop it into the two cottage spots the council has suggested that they put there.

            It may not stack up in terms of feasibility. It might get left there as an ugly duckling warehouse. Or I could put a mechanic's shop or a panel beater in there. Neighbours obviously-

Phillip Tarrant:         You could do that tomorrow, could you?

Eric Brown:   I could yeah.

Phillip Tarrant:         So you just open it up and turn it into a panel beaters.

Eric Brown:   Yeah.

Phillip Tarrant:         Okay. I imagine the council actually wants a nice beautiful property that's representative of the pedigree or the heritage of the area, but within a modern world right? Anyway.

Eric Brown:   On the head, mate. On the head.

Phillip Tarrant:         Yeah. All right. So if you're listening Lockhart Council, come and have a chat with me if you want. I'd be interested to see what your views are on this. Not this particular development, and this is out to any council actually. This whole process of supporting developers through this DA process, because as I mentioned right? Council's have grown, advanced and have nice properties and good people and this sort of stuff.

Eric Brown:   It lifts the suburb profile, you get the median house price. Which is good for a suburb, because then your taxers go up, the council gets more money, they get to make new parks and fix the roads and everything else. Schools.

Phillip Tarrant:         I'm gonna get some councils on my programme I think just get their take on it.

Eric Brown:   Can I be a panellist that day?

Phillip Tarrant:         Maybe not. I'm gonna keep you away from them. I don't know what you'll do.

Eric Brown:   Yeah. You're right. Smart.

Phillip Tarrant:         You sound a little bit annoyed.

Eric Brown:   Smart.

Phillip Tarrant:         I'm pro councils. I think councils do a great job. Particularly rejecting DAs like yours I think.

            All right. Eric. A good snapshot.

            Two months time, are you back on?

Eric Brown:   Two months, two months time I'll have some funding sorted out. Not a constructional end, but I'll have some funding sorted out. This is me in my glass 99.9% full phase. If I do get rejected with the 82-A I'll take them to the planning panel and have a positive outcome from that and be ready to talk to you about how we fund the construction and what sort of hoops I've got to go through to get that up and running and hopefully start planning with a builder about starting in the near future.

Phillip Tarrant:         Okay. Good.

Eric Brown:   Thanks, Phil. Thanks for having me.

Phillip Tarrant:         Thanks, mate. Keep up the fight. You know? This is the game.

Eric Brown:   Yup.

Phillip Tarrant:         This is the process. You've got the rules have been set by the council, whether you think they're right or wrong, it's irrelevant. They're the rules for the council. And it sounds as though you've got a number of actions in your swag of potential actions moving forward to get out there and hopefully prove or meet the council's requirements in all they undertake. Keep at it.

Eric Brown:   Thanks, mate.

Phillip Tarrant:         It's good.

            If you like what we're talking about in relation to Eric's latest development, remember the last time we spoke to Eric, 27th of November. We spoke to him prior to that about two months before as well. We'll put it all down in this particular show notes where you're listening to it so you'll listen to some of the other stuff as well.

            You may notice the change of attitude of Eric from being very excited and optimistic to, its just really the curve of change really. Excited and optimistic through to-

Eric Brown:   Stoic?

Phillip Tarrant:         Stoic through to maybe the anger phase to the realisation phase and now the action phase. I'm gonna actually do my own little graph chart on this.

Eric Brown:   Yeah right.

Phillip Tarrant:         And see where we're at. Hopefully the next phase of this is-

Eric Brown:   Happy.

Phillip Tarrant:         The happy phase.

Eric Brown:   By the way I do love stars, Phil. So for all the listeners out there, it's great. I get a lot out of this podcast listening to you and your other guest. If you are sitting out there and you're got five seconds free, tap on those little star ratings. Give me five. Give Phil five.

Phillip Tarrant:         Really?

Eric Brown:   I'm pitching for you, Phil. It's just the type of bloke I am.

Phillip Tarrant:         Well. Maybe you should get a five star DA theme put together. Might make it easier for you instead of four star.

            No, but do that. If you like what we're chatting about, I do appreciate the reviews on iTunes or wherever you listen to it, and particularly the guys behind the show as well. It's just not me here chatting about this stuff. It's also our guests, including Eric.

            Also our very capable producers including Adam, who's here today, who makes this sound good, who puts all this stuff together and does all the post and pre production stuff. He's important.

            Any comments or questions, you can contact the team at thesmartpropertyinvestment.com.au. A lot of people do email that. We will get back to you. But anything you want to know or would like to hear, just get in touch. Any questions, particularly for Eric. Maybe we can do a Q&A session around this. Eric, you'd come back for that, wouldn't you?

Eric Brown:   Yeah. Absolutely.

Phillip Tarrant:         We can chat about what your views are or thoughts on Eric's current situation, trying to get this DA and this development in Lilyfield. You might think he's an absolute raging maniac and should just give up and cut his losses and move on. Or you might want to fly the flag for him and see and hope that he comes out on top, which I'm sure he will do knowing Eric quite well. He won't let this beat him.

            If you like social media, just search Smart Property HQ. You can track down what we're doing. And importantly, if you're not yet subscribing to our morning market intelligence within the property investment, be the first to know what's happening in markets across Australia and how you can best capitalise and create wealth through property.

            Smartpropertyinvestment.com.au/subscribe.

            We'll be back here next time. Until then, bye, bye.

Announcer:  The information featured in this podcast is general in nature and does not take into consideration your financial situation or individual needs and should not be relied upon. Before making any investment, insurance, tax property or financial planning decision, you should consult a licenced professional who can advise whether your decision is appropriate for you. Guests appearing on this podcast may have a commercial relationship with the companies mentioned.

 

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