Interview: Jared Della Valle of Alloy

In September 2017, I sat down with Architect & Developer Jared Della Valle of Alloy in Brooklyn, New York. See more information about Alloy at alloyllc.com. Watch Jared lecture in a panel on Architect as Developer at Harvard {here}. See more articles about Jared {here}.

Jared Della Valle: It was my thesis in graduate school, to start a company that would do both architecture & development. So I have been at this for a while. I recognized that there were two issues. The first is that if you are not working, you are not making money as an architect. The second is that you are just providing a service for someone else. There is no way to meaningfully capture the value of your intellectual property. When I graduated, I wanted to start my own company and I had determined that there was no practical way to find clients out of school. I began to get frustrated. So I decided I would try out the business model I had figured out in graduate school. I simply went out and started placing offers on buildings. When I was looking for money, and because I didn’t have any, nobody questioned that I would be the architect for a project that I was bringing to them. After a while, I started writing pro formas and business plans; I was doing all of the work and I realized, ‘this is stupid.’ I should just be a developer. There is nothing special to real estate development that an architect doesn’t already know.

James Petty: When you were starting out, how did you know how to put those first pro formas together?

JDV: I took one business school class. I didn’t really learn much from it, other than that my idea could work. When I came home from working at the construction company or from the architecture firm I started with Andy Bernheimer, I would spend every waking hour teaching myself. I was figuring out how to do underwriting on my own. I would shop properties, create pro formas and was underwriting things that I had no intention of buying. I wanted to practice and go through the process. I would have my friends who went to B-school verify my work. I started asking people what they thought since I didn’t know the language of real estate or business. I didn’t know anything, not even Excel. So I literally taught myself.

JP: How long was that process from educating yourself until your first deal?

JDV: It took me seven years to get my first deal. I was building another business, and I thought it would go hand in hand, but it really didn’t. I had to build the architecture firm in a way to convince people that I had the capacity to build buildings for them to feel confident about investing with me. I also had to build my instinct to know if a proposed project was actually a good investment. I had to build a real estate network of brokers and otherwise find real estate.

Ultimately, I was able to figure out where my value was in the development process and what value I could offer since I didn’t have any of the money myself. Finding a deal is actually the hardest part. If you have a good deal, you have a good deal. Then it’s easy to find investors or partners. I always committed to putting in all of my services into the project for free. Architecture services are very valuable.

JP: So your architecture fee was your equity in the first project?

JDV: Yup. You spend eighty percent of the architectural fee before you start construction. So it was real cash that someone would otherwise have to pay you. We leveraged the time of the architecture company to invest those dollars in real estate. The other thing I did was that I never took on work for a speculative developer. If anybody asked me if I would do sketches for them in order to get a commission, I would say ‘No.’ My time was too valuable to me to give it to someone else for free. I had a better chance of utilizing my time to drive my own success. That was just a valuable lesson in life I learned early.

JP: Do you still use your architecture fee as deferred equity?

JDV: No. We are a full service development company. We are not an architecture firm that is doing development; we are a development company that has a full staff of architects. It is a different animal. We don’t provide architectural services for anyone other than ourselves. We have a construction company, we have a brokerage company, we have a management company, and we have architects. We don’t work for anyone else.

JP: Are each of the companies split into separate LLCs with arms-length contracts?

JDV: Yup. Really complicated, but really separate.

JP: Does that involve a lot of lawyer fees?

JDV: Yup. A lot. A lot. But it works. Every so often I get questioned by certain professional organizations about all of this. I am the architect and sign and seal all drawings. It just so happens to be that I am also the client and that I pay myself. Lenders were initially concerned that we were on all sides of the equation. Now, our lending relationships love it but only because we proved that it can add value. It’s funny… If I sign a change order, I have to sign all three lines. I am the contractor, I am the architect, and I am the owner.

JP: I am assuming that you take out construction loans for the projects. Do you have investors that help in the initial capital required to meet the bank requirements?

JDV: Yes. We have done it a handful of different ways. We have raised capital from private individuals, we have provided all of the capital ourselves and we have had institutional capital partners. It really depends on timing, needs, and opportunity. Right now we are working on a full city block in Brooklyn where we provided all of the capital internally. We will bring in an institutional equity partner when we are ready. We just want to establish what the project is, get it approved, get it permitted, and have it 100 percent ready to go. It makes for a better investment for future partners because their returns will be better over a shorter period of time. When everything is fully entitled we can get a better deal for ourselves. It also means that somebody is buying into our vision for a project versus having to negotiate what the program is, how big it is, and what the project typology is. We can say, “Here is what we are doing, would you like to invest?” It makes the process a little bit easier.

JP: How can you quantify the value of good design?. You design, develop, and construct these buildings. You get to see all sides.

JDV: It is weird because we are not last dollar developers. So I have a hard time answering that question. We prefer absorption over ultimate dollars. That is better for our returns anyway because it is faster. As an example, we are currently done with sales at One John Street. Our competition still has inventory left. By the time we were punch listing the building, we were able to pay back all of our investors and lenders. We were done essentially a year early. It saved us millions of dollars in bank interest. It saved us interest on our institutional equity partners’ capital and it also saved us the anxiety of sales. It allows us to sleep at night knowing that our buyers got a great deal, that they closed and that they were excited to close because of it.

JDV: We sold all of the units at 185 Plymouth in ten days. Had we waited until the end when construction was complete we would have made a lot more money. But we had people who were excited to close. We had people that we had built a relationship with along the way as well. We had dinner in the construction site a couple of times with our buyers and tried to make everybody feel like that they were investing with us. We want to convey that it should feel good, that they should tell us what they need no matter how irrational. It was also important for them to know that construction is not a perfect process. Your air conditioner might not work, your hot water may break one day. Ultimately, the question is: will we be there for you? How can we make people feel great for having invested with us? Brokerage does a great job at starting the relationship. It means we get to know every single buyer and their kid’s names and anecdotes about their family. It means that we will own real estate in all of the buildings that we develop with them. We are trying to build communities of people. We always participate on the condo boards after completion, and we always do way more than what we are asked for or even promised. Every little thing makes a difference. If you are spending $4 million on your home, we want you to feel great about it.

Leaving money on the table is worth it every day. So it’s a funny question, ‘what value does design bring?’ I think it brings absorption, which to me is ultimately a return. We are not seeking ultimate dollars. It is not what we are interested in. We are seeking quality of community and building a place that people are proud of. It pays off, just in a different way.

There is nothing about real estate development that is a secret. We learn through our architectural education how to sell the intangible. So there’s not an extraordinary leap to become a developer once you know how to build a building. Being a developer requires you to take risk though, which is the real difference between an architect and developer. The younger you are when you start the better because you get accustomed to taking risk. As soon as you start having a wife and kids and a mortgage, it gets much harder to take the level of risk that it requires.

For more on Jared Della Valle, see the book Architect & Developer: A Guide to Self-Initiating Projects. See more articles about Jared {here}.