Interview: Al Gore & Lance Cayko of F9 Productions

In September 2018, I spoke with Architects & Developers Al Gore and Lance Cayko of F9 Productions from Longmont, CO. See more information about F9 at f9productions.com. Al and Lance have a fantastic podcast that goes through the daily activities of running an architectural practice and their current role as an Architect & Developer at insidethefirmpodcast.com. See more articles about F9 Productions {here}.

Al Gore: It literally started probably a year after we started the firm, which was 2009. Jonathan Segal was our inspiration. We even bought his course. I thought it was just a great way to go. Our philosophy has always been to take on more responsibility. If you take on more responsibility, you get more reward.

We started with a tiny house build. Lance and I wanted to do it. We had a great idea. We’re not going to make it like a cabin, we’re going to make it like this cool, transforming modern thing that has all glass on one side. It has a fold-down deck and a fold-down awning. So that it’s no longer tiny. It’s going to capture water, it’s going to have solar panels, it’s going to be all wood on the inside and super cool. We got that on Tiny House, Big Living.

AG: So that was step one and step two was a big fortune 500 company came and they said we want this, but we want it on steroids. Meaning we want two of them, we want them bigger, we want the audience bigger, we want a sky deck that goes on top. We want that to be on hydraulics. We want folding rails. So just craziness. So then that was kind of step two. Um, and then we’re holding, you know, we’re piling up money. Lance and I are keeping everything smaller.

Lance Cayko: Are we?!? We’re piling them money?

AG: We’re looking at a smaller pile. We’re like pushing dirt for money. I don’t know what the analogy is. We’re holding onto some money.

LC: There ya go.

AG: Keeping salaries low. Expanding the Firm. I’m teaching our system at CU, which is the University of Colorado Boulder. Then I’m getting the best students from there. Our work is expanding and then essentially we come into this position where we can actually buy land and then where we have enough people where we can do this project while also running our firm and doing other projects. That all started from the beginning too. Lance and I always had the idea that every year we’re going to do at least one fun project. Besides being fun, we don’t care if it makes money or not. A lot of times money does come back because people say, “Oh, that’s a great idea. We either want to hire you for something else or we want you to build that.” But the idea is not monetary whatsoever. It’s just this is the coolest thing we want to do right now. So that we funded all by ourselves, put it in all our own money, went alone, didn’t have really any idea of what we’re going to do with it. And it was a large, large build, but it progressed into where we are now.

LC: I think that’s the comprehensive reason why. The explanation of how we got into development, and why we’re doing development. But I’ll just cut to the brass tax. In my perspective, it honestly comes down to financial stability and making money. We are big “C” capitalists at this firm and I would say we are probably less architect and more capitalist just because of what Alex described. We’re trying to have all these various legs we can stand on. But at the end of the day, the biggest thing that stuck out to us is that if you can be the developer you get paid once. If you can be the architect, you get paid once. Then if you become the contractor, you get paid another time. So you can get paid three times to do the project. And then on top of that, you get to have control over the whole thing. For better or for worse, you know.

One of the things that we’re finding is, you know, we feel like we used to get beat up by developers all the time on fees but then also design. So you put your heart out and hold them to the design. But it’s been interesting for us to see the backside of it. I’ve just kind of been a cutthroat contractor and just having to slash things that are pretty meaningful in this project to get it under budget. At the end of the day, what it’s going to enable us to do is be better architects. We’re going to have such a better idea of how much things cost just from the beginning. Like, let’s just not even pursue X, Y, Z because we know it’s going to get cut anyway. What is the better way to approach, X, Y, Z on a project?

AG: It was so funny. We’ve done a dozen of these projects that are very similar for other developers and each time we say we’re not going to go up to the inch setback line. We’re going to give ourselves some play. Then we do our own development, and suddenly we’re up to the inch because that’s how it works out.

To put a caveat on what Lance said is that yes, we’re capital “C” capitalists, but big “A” architecture-capitalists. It’s not coming solely from the idea that we want more money. It actually comes from our birth. We were born during the recession. Lance and I were at the top of our class in architecture school. We worked at amazing, world-famous firms, and then the recession hit. It’s like, okay, we just worked hard for six years of school, two years working for these guys, did what was defined as really good work and really hard work. And then the bottom fell off. So then we realized, oh, they only have one system of making money. They had no backup plan. They didn’t have multiple legs. You don’t know this when you’re young. That is kind of where it stemmed from; getting stability. It’s a big “C,” but it’s also a big “S” for stability. We live in that world where Lance had kids and I had an apartment with nothing in it. If you are old enough that you went through that recession and you were a good worker and it did not matter, that leaves a lasting legacy.

James Petty: So you guys took the Jonathan Segal Architect as Developer course. Is that where you learned how to make pro formas? Did either of you have any other type of formal business education?

LC: Nope. We took the class and the big takeaway for us was that you can treat a building permit as cash equity. Architects always like to complain, and rightly so, that we don’t make any money. Part of it is because some of them are just too far into the art of it and less into the science and the business side of it. The other part of the reality is that you’re not making as much profit as a developer. So it’s hard for you to like get enough capital together to be able to do projects like this. That was our big learning lesson.

He [Jonathan] was able to put all of his time and effort in. Obviously, you pay your engineers and stuff like that to do a portion of it. So there is some cash equity into it. But the fact that you can take the drawings to a bank and say these are approved, this is how much they’re worth, and therefore use that as cash equity. And then do things like defer the developer fee. On a project like ours, there’s actually a line item in the pro forma that we were kind of shocked to find out. Developers put in a line item that says, “Our developer fee is 10 percent.” Well obviously there’s a lot of work that goes into being a developer, so they have to account for it in some way. Well you can go into a bank and you can defer that fee and it can count as collateral. Not all banks recognize that. You need to find a bank that recognizes that and values what you’re saying is there. The same thing with the contractor, you can defer the whole contractor fee. So all of a sudden you’re in this interesting position that you never thought you could have been in.

The pro forma side of things came from the EntreArchitect community on Facebook. They were happy to give us some pro formas and then they pointed me to this amazing website, guerrilladev.co. They had everything online. We just downloaded them. And then we just went through it and kind of did it. It’s kind of reflective of like how we run F9. At the end of the day, we just use a lot of common sense.

JP: So you were able to get the bank to recognize the architecture, developer, and contractor fees as part of your equity up front?

AG: Yeah. The key to that was that there was one bank in the area that everyone uses. I told Lance that we need to get them in here and take them into consideration. But we need to have multiple banks because some of them tried to pull a fast one at the end. You defnitely need to have multiple banks working with you. Just to choose one and lock yourself into that, I don’t think it’s the right game.

JP: Did you find your bank by talking to other developers in the area realizing that they’re all using the same people?

AG: That’s how we heard about one of them.

LC: The one that we really liked that stood out for a couple of reasons. So what they did is they basically looked at the development log. It’s public where we operate in the city of Longmont, CO. They saw that we had a plan submitted and they reached out to us. And then what kept standing out is they kept following up with us. You could tell they were interested in us and they even went to our planning and zoning meeting, which is huge. It’s literally reflective of how Alex and I run our businesses. Phone calls within 24 hours. Emailed back within 24 hours. You know, run head-on into problems and the go after people and be enthusiastic.

JP: In Episode 4 {listen here}, you mentioned that you were trying to mitigate your upfront cost by working out a deal with your engineers and consultants. You talked about the idea of trying to pay them a higher fee overall but only 20 percent pre-construction with the balance when the project sales. Basically, getting your consultants to co-invest. Did this work out? Were you able to get consultants and engineers to sort of co-invest with you?

AG: No, that didn’t work out. Some of them gave us a buddy deal and lowered their fees to normal. Some of those worked out. I would say one of them was the wrong fit. We forced a commercial person into a residential situation and we need to rectify it now. I don’t even think that what their plans gave are buildable or cost-effective. So there is a risk there. There are people that I know now on bigger projects that I would call in. They’ve done this a million times. You’re not going to get everything 100 percent right. I think that’s the lesson. People want to have all their ducks in a row before they pull the trigger. You’re literally building the bullet while you’re on the ride in the ground. That’s what you got to realize.

JP: How much money did you have to spend up front on consultants, engineers, fees, and other costs without making any money until the project is either rented or sold? For another architect that is trying to get into development, what kind of upfront capital should they be expecting to spend?

AG: Lance is doing the math.

LC: Rattle off the different items and I will add it up.

AG: MEP. Landscape. Civil. Structural. Surveyer. Surveyer plus soil. Insurance.

JP: Did you guys need to use an expeditor or have any city or permit fees?

AG: The fees are wrapped up in the loan. Expeditors are not a thing here in Colorado. But you need to budget and have your firm be afloat for how much architecture you have to put into it. If you are talking about doing a project that is bigger than a house or duplex, you are talking about a staff member being dedicated for a long time.

LC: Yep. I just kind of added up some rough numbers here. This includes all of our engineering, consultants, surveyors, everybody like that, where it ended up being cashed. It was about $75,000. So like Alex was saying, then you add architecture on top of that. Diferred architecture fees. That was probably another $175,000 worth at the market rate last year. That is where you can really prove that this is really equitable cash coming in. The other thing I was thrown on top of that is we have paid about $70,000 worth into land development. So we took out this three-year balloon loan.

AG: We put 30 percent cash down.

LC: So at the end of it, I would say hard cash ended up being about $150,000 and then on top of that it looks like deferred architecture fees are about $150,000. It looks like the total amount of what we’re saying is our equity in the project is between $300,000 and $400,000 to bring to the table and get the deal done in this very unique way.

JP: The land loan is something that’s very unique. You guys took out a three-year land loan, but that was quite a while ago. How is the land loan working out now with the standard timeline of development along with all of the delays with the city?

AG: We still have some time on it. The land loan will transfer over into the construction loan.

JP: Does that transfer happen once construction is complete with the take-out loan for the construction loan, or does the land loan get transferred into the construction loan once construction starts?

AG: Once it starts.

JP: So all you have to do is get into the ground within the three-year period?

AG: Yup.

JP: What is happening with all the entitlements on this project? Does every project within Longmont need to go into the city for special approval?

AG: Anything over a house has to go through the site plan review. And what’s crazy about this, if you boil it down to simply pages that you’re turning in, there’s a lot of work done for every page. The site plan review is basically 20 pages, maybe 25 of architectural, civil, landscape, and a couple MEP. Now the architectural plans with full on everything is about 85 pages. It took over a year and a half to get approval for site plan review and we will still had as many consultants for a building permit. But that building permit took two months.

JP: It feels like for the first project you would almost want to try and avoid something like that. Just to mitigate the risk. Have it all done faster and just get the project out from underneath you.

AG: Exactly. Move to rural Iowa and they won’t care.

LC: It’s such a double-edged sword. Because of all these regulations and the terrible process, it makes it so that the housing stock is very slim. If you can build something, if you get it through this process, you have a product that is so highly sought after that you can make money on it right away. Whereas if you go to someplace like Iowa, North Dakota, or whatever where it is very lax, you can just get something through. We got a gas station in North Dakota through in under two weeks. It’s a gas station. You’re talking about EPA flammable stuff. Still in two weeks up in North Dakota. But you can’t. The market up there is terrible to sell stuff. It is what it is.

So yeah, it’s a risk to take on a project like this and navigate it through such a cumbersome system. But we had cut our teeth enough on other projects in other cities enough that we knew we could take a little risk here and even though we’re not through site plan development, we can submit building plans to try to compress time a little bit. We were able to do that. If we end up with a building permit right now, we’re talking on September 07, which we think we’re going to be able to by

September 17th, we’re only 17 days behind where we wanted to be. I mean we obviously want to be building as soon as possible, but I think we did a pretty good job at compressing time by doing those kinds of things.

JP: Lance, you got your class B contractor license to be the GC for the development project. Did you require that license for the project in Colorado?

LC: Yeah, it comes down again to equity, right? With that, we are able to say to the bank that we’re going to defer 70 percent of that fee. So that is hundreds of thousands of dollars that we don’t have to finance. That’s really the leverage point with that whole thing. And then also be able to be in control of the whole project is critical. So it wasn’t a requirement actually. Nobody required it other than ourselves. I think it was a requirement that we recognized we needed to meet order to get this financing done.

JP: Right. I’ve heard that being a licensed contractor can also help you with your insurance premiums. Was that the case for you guys in Colorado?

AG: I think with typical residential it might. We had to do condos and condo insurance is insanely expensive. We also had to get Wrap insurance. This is what was so hard dealing with the city. They even wanted to change rules on the pathway as we were talking to the mayor and to the city council. One of the best pieces of advice is if you’re starting any project that is bigger than a house or duplex, you have to start meeting with these people earlier and establish relationships. They don’t honestly understand the ramifications of their laws. They were trying to do affordable housing that would apply to us. They said that it won’t really affect our project. They thought we could sell them for a specifc amount. Technically, we’re condos. We can’t sell them for that much based off of their affordable housing standards and prices. “So why are they condos?” Their zoning code won’t allow us to lot split like in Denver. It’s crazy explaining to them that Denver, which is a very very hot market, and no easy feat to get through the building and site plan review, they are more stringent and more restrictive and have more rules up here that make it cost more. They just don’t understand that. So the process.

JP: So you guys are planning to sell off the units as condos?

LC: Yep. Swinging back to Jonathan Segal and a lot of other architects. They never do condos. Then you realize the project we are developing is the same sort of scope and size as the one Jonathan did to launch everything. He ended up not doing condos after that. I think he did like three or four of them that were technically condos. At the end of the day, he said don’t do condos, but then sometimes you just got to do condos to get yourself going. He says to get as much insurance as you can. Whatever the maximum you can. For this project, we insured it for $2 million. We technically only needed to do $1 million, but we ended up doing $2 million. It didn’t escalate the cost too much for the insurance premium. So that’s all you can do.

The Warp insurance has been actually pretty enlightening. They bring in a third party inspector so our eyes are going to be on it the whole time. The third-party inspector comes in and they make sure that that construction is done the way they are anticipating. It seems like a pretty foolproof way. You can even save a little money from your subcontractors. You can say, “Hey, I’ve got this Wrap insurance policy, therefore you guys don’t technically need as much insurance because I’ve got you covered.” Then you can reduce their fees directly and save some money.

JP: I think that is one of the most concerning part of creating a condo. You have potentially one big roof. If it starts to leak, you have six different lawsuits to fight off. You know there are all of these attorneys who basically just go after insurance money.

AG: Yeah. So our solution to that is that it’s a mixed-use project and one of the units is our office. If there’s a problem, if there are things going wrong, we’re not going to be blind to it. We’re going to quickly respond and communicate, which is what I think the problem with most developers. They’re slower to communicate and people get frustrated, things don’t happen. Right? It turns into a disaster. So that’s what we’re not doing.

JP: Is one of the reasons you guys wanted to do a mixed-use development to get a free office space out of the deal?

AG: There will be a monthly payment on it, but it will be in line with what we’re paying now. Except we will own it.

LC: That’s part of it, trying to be lean and mean. We’re taking this giant risk to once again get lean and mean. And then after this project, we’ve got my eyes set on a piece of property that’s on Main Street that we’ve already had a scheme worked out with the new zoning laws and ordinances. We should be able to do higher density. So we do want to try to move into where Jonathan Segal is now. He does mixed-use projects where it’s commercial on the first level and then rental housing above. He holds onto them for two years and then sells off the whole thing. So he started doing this, and now the guy is a multimillionaire. He only does whatever he wants to do at this point. We will still always take on clients, right? But I think it just allows us more flexibility of who those clients are. We would have more leverage with what we can charge because we can turn down other stuff. That’s where we’re heading.

JP: So for this development, are you guys getting a standard construction loan of about 70 to 80 percent of construction costs?

AG: Yup. 75 percent loan.

JP: Are you using the equity from your fees and what you put in for land acquisition to help bridge that gap? Or were you guys also bringing in cash money to the table?

AG: So far, we do not have to bring in any partner other than Lance and myself.

LC: Do we have backup plans? Yeah. There are some interesting details that we won’t disclose about how things work. But I will say this, if you get out of the residential realm and you get into the commercial lending business, money can change hands a lot differently to make things work. That’s the big difference for us is that this will be a commercial loan. For the bank, it’s not a lot of money. To us it is, right? $2 million is nothing to scoff at that. That’s what it’s going to take to get this done. It’s been a learning lesson for us and they just keep saying, “Oh yeah, this is easy. We can take care of this.” Once we submit the application, they take care of it in three days as an administrative review. They see no problem with us literally building within 10 days from this conversation today, which is kind of blowing my mind.

JP: You guys mentioned in episode 27 {listen here} that you don’t necessarily recommend people with an undergraduate architecture degree going back and getting their masters degree. What about a business or real estate degree? Do you think getting an MBA on top of an architecture degree is valuable? Do you wish you had gotten an MBA?

AG: Two thoughts on this one. I haven’t got an MBA so I don’t know if my opinion is valid, right? But secondly, I got my masters in construction management. I took classes and then I did a studio portfolio, like a project, but I took it to a deeper level. I made the website. I actually made a pro forma. I talked a lot about sustainability. I designed the townhomes. I have this thesis book. I go, “holy cow.” I looked at the layout. It was three levels stacked with six units. So I was like, “Holy cow, it was kind of a prep.” The problem with school is that it’s maybe great to be aware of what to look at and what you should do, but what it’s going to come down to in the real world is to take those steps and then call the people in the industry that you know to get the right answer and what’s actually going to happen. Then you’re playing the game of do I want to pay however much it costs for a degree, $50,000 to kind of just get an overview of what’s going to go on. And then know that I’m going to have to relearn things for specific situations and consult with people. Or should I start developing those relationships now and developing that background because that’s what has actually paid off for us.

I’ve come to the conclusion is maybe it’s not worth it to pay that money to sit in an isolated tank and throw darts against the wall that doesn’t have much feedback.

JP: You’re more interested in getting into the field and going for it. Simply learning as you go along.

AG: Yup, as long as you have some sort of competency already. Someone taught you how to draw, how to design, something like that. I understand you have to have a certain level of education, but I think it’s maybe going a little bit too far. It’s just that feedback loop in the educational world is looser than the real world.

LC: I’m now at that point in my logical conclusion about higher education. How many people are educated? How many people have degrees right now? We live in Boulder County and this is the second most highly educated population in the United States county-wise. We have the most masters and PhDs per capita. My conclusion is to only go to school for the least amount of time it takes for you to satisfy licensure requirements. So if we’re going to go for a contractor, look into maybe a two-year degree. That’s it. That’s all you need to get qualified and build your resume.

Same thing with architecture school. We have a couple of guys right now in the firm that are going to go the long route in Colorado. They have a bachelor’s degree. But if they do thousands of hours of work underneath Alex and I as licensed architects, they can still get licensed in Colorado. It’s the minimum amount of time, money, and effort that you need to put in to get that license, which then enables them to do things like we’re doing.

AG: This is what’s hilarious about the hour requirements, right? I don’t know the real number, so I’m gonna make this up. If you get your master’s degree, let’s say you have to do 5,000 hours and then you can take your tests and do all that. If you don’t have a master’s degree, maybe it requires 7,000 hours. But oh, that’s two years. Master’s degree from their bachelors will take two years. So either I could do two years and pay someone or I can do two years get paid. It worked out with the same amount of time.