Interview: Zeke Freeman of Root Architecture & Development
In September 2017, I sat down with Architect & Developer Zeke Freeman of Root Architecture & Development in Denver, CO. See more information about Zeke at root-ad.com and articles {here}.
Zeke Freeman: We started with a very basic level of development with some house flips and remodels. We also used a 203(k) loan to self-“nance some deals. Then we did our first new home-build. I think architects can be great at this.
In the beginning, it was all about getting funding as a small entrepreneur. The real struggle was financing the deals. You really can’t do it alone. There is this initial mentality that you are going to go in and have a great vision and people are going to want to fund your project. As I was first launching Root Architecture & Development, I thought I would start the business and development at the same time. I was going out and pitching to a lot of investors and trying to get funding without really having a reputation or track record. That was really tough. I got a lot of rejections.
I finally got a few projects through self-financing and one hard-money lender. Through that, I became more involved in design-build. I also earned my GC license. That was the real catalyst that started our company. Suddenly, people started calling and were interested in our design-build work. That grew into custom single-family houses and some multi-family
projects.
As the architecture practice has grown, we have started doing more commercial projects. We partnered with a commercial builder. Our focus has changed a little bit. On the development side, we have a few projects that we are re-examining. Now that we have completed a few projects and we have a real track record, we are now at the point where we can look at more traditional methods of financing.
James Petty: You mentioned that you used a 203(k) loan for one of your projects. Can you talk about that?
ZF: That was what we used for the Indian Hills House. We purchased it for $130,000 and took out around $105,000 to renovate and construct an add-on.
JP: The 203(k) loan is a really interesting product. Since it is an FHA-insured loan, the down payment can be really low. It seems like a really great product to acquire property and have financing to renovate it with low upfront costs.
ZF: Yes, it is an awesome way for an architect to get in and do their own thing. You can do more than one unit too. You can potentially purchase a lot that is zoned for multi-unit and live in one unit while you rent the others. For us, we secured the loan with a 3 percent down payment. Financing can be really challenging, especially coming out of architecture school. If nothing else, it builds a little bit of net worth and real wealth that you’ll need to be able to get the next loan.
JP: Did you use the 203(k) loan to purchase and renovate your own house? Are you guys still living there?
ZF: Yes, once we had equity from our home, we were able to use that property to leverage financing on later projects. What we are working towards now, though, is partnerships. We have a couple of deals that are on the table with clients that are already developing projects. We have conversations of investing our equity into the design and construction of those projects. That is where we are currently looking to go.
JP: That is a sweat equity model. Would you be deferring all of your fees upfront?
ZF: I thought of that term [sweat equity] a lot while we were doing the “x and flips. That involved real sweat too though! We charge a fee for the architecture, and we charge a fee for the construction. But we are going to turn around and put that as equity into the project rather than taking the money now. We are also interested in long-term ownership of rentals. We are even looking at creating something such as an AirBNB building.
JP: That is an interesting idea. Often with multi-unit projects, there is a lot of pushback from people using their property on AirBNB. There should be a market for using a building strictly as a group of AirBNB units. Though I guess that is almost a hotel.
ZF: That is what it falls into. There are a few of these projects now and Denver doesn’t quite know what to do with them. They’re ground-up hotels but they don’t fit into a traditional hotel model with hotel taxes. Those are a little bit tricky. We have a few that we are looking at where we are renovating existing buildings to create executive suites, which are full-floor condos. The building may already be set up as residential use, but we have to change it from something like an R3 to an R1 for the AirBNB model. That change has a lot of accessibility requirements. Then we try to “t it into a hotel model. It is not quite a hotel and not quite a personal residence. We’re trying to figure out what boxes to put everything in.
JP: Is your wife a realtor within your office? Does that mean that on any particular project, you have the opportunity to generate architecture fees, contractor fees, developer fees, and realtor fees as well?
ZF: Yes, however, our main focus is ensuring that we are serving our clients well. We are not trying to do everything, but we are involved in a certain niche and in a certain market. So we have a lot of knowledge in that. Then we look at what the needs of the client are. In the case of building urban infill projects, it starts with finding land first and understanding when you are designing these things what the construction is going to cost and what the market for it is. You have to know what the financial model is. You get di$erent clients coming in at di$erent places. Sometimes we have a client who is a builder and a realtor, all they are looking for is the architecture. Sometimes the client is a money guy, and they need all three pieces:
architecture, construction, and realty. By having those three pieces, it opens up different fee structures that we can bill towards, but also different levels of expertise for our clients. We can speak the language of all the pains that any client will typically deal with.
JP: It sounds like you have an advantage over the standard architecture studio that only designs buildings.
ZF: Absolutely.
JP: Did you take advantage of the in-house realtor for the fix and flips?
ZF: That was why got into it! We were doing these fix and flips and paying realtors as much as we were making. It is always greener on the other side. Having that now and working closely with my wife on the real estate side, we value that a lot more than we thought we were going to. There is a lot of work that goes into getting to that sale point. There is a ton of marketing and lead follow-ups.
JP: Was she already into real estate before you guys worked on the fix and flips?
ZF: No. She got into real estate because of the fees that we were paying. We were like, “Forget this. We will just do it ourselves.” That is our typical mentality. She is doing well with it. At first, we thought it was going to be a piece of cake. But like everything else, there are no shortcuts. There are fees for a reason. It is the same on the construction side. As an architect, you are looking at the construction fees that may be two times what we are charging as an architect. I spent seven years in school to get licensed and afterward did all sorts of construction things such as a framer and being a GC. But there is a lot more risk that happens in construction. The biggest aspect of construction is how much risk are you willing to take on, and how much can you manage that risk? All of a sudden, you are liable. If the drywall guy makes a mistake, you have to be the guy to step-up to the plate and take care of it.
JP: What led you to the architect-led design-build (ALDB) model?
ZF: It was all out of frustration and pain. We got into real estate because of the frustration and pain. The construction side is the same thing. As an architect, you try to push the quality of design and make great spaces. There is that innate battle that is set up between the architect and the contractor. You are going to push something great out there and you’re going to get it pushed back for whatever may or may not be the budget. But you never really know what is behind that shady curtain of what things really cost. We wanted to unveil that and add clarity to the process.
JP: You can also gain a lot of effciency with ALDB. You no longer spend hundreds of hours answering RFI’s and processing submittals. As one design-build entity, you don’t waste all the time used for coordination that is required when a project has a separate architect and contractor.
ZF: Yes and you are also charging more fees. It is a lot more expensive to run a construction site, but it is more effcient in terms of communication. It takes a little bit of that pointing fingers away. You are no longer in that position of pointing at the contractor for making a mistake or pointing at the contractor for destroying the design. You are it! You are taking that responsibility on. There are risks and rewards with that. We are all sitting together at the table as a team. We are trying to make the best project that we can with the budget we have to work with. What construction really takes today is constant communication. There may be a detail where with a typical design-bid scenario it gets missed. Then the contractor decides to do it on his own. Nine times out of ten, he does it wrong. If you are designing and building while in constant communication with your team, you can pick those things up. We have daily huddles and weekly meetings to review how we are handling everything going on. We hang out on the job site and sketch out details in real time. It really brings a level of communication that is really needed today.
JP: Did you get your general contractor (GC) license after the fix and flips?
ZF: Yes, we were doing our own development, so I obtained it for that. Then some of the developers that we were doing design work for started asking us to manage the construction too.
JP: How many development projects have you guys completed?
ZF: I did about four or five projects that were either fix and flips or custom single-family residential. I have really focused the last four or five years on the architecture and construction side of things though. Going through the pains of trying to get investment capital is a whole other skill set. You have to be at a financial point where you can take a lot of risks. A lot of hard money loans require you to put all of your personal assets on the line while paying high interest. That is one entry mark. The 203(k) loan is another entry mark. I felt like that was a better entry in terms of financing. I felt like we could use that to build up relationships and a portfolio. At least then we weren’t coming to the table empty-handed for the next project. It is better than showing up and being like, “Well, it is our first time to do a project. We would like to develop it. Would you fund it?” That doesn’t work. Now that we have done a number of projects, we are in a better spot. If you want a turnkey solution, we have the subs lined up. So we are starting to dip our toe back in. Come back to us in a year or two and we should have something really interesting.
JP: So you think that the optimal model right now is to “nd someone who is already a developer and partner with them?
ZF: It is a way. You have to use your assets. If you are born with a trust fund and a lot of family money, go for it. There is no shame in that. Do a project with your family money on the first one. If you are bootstrapping like the rest of us, you need to try something different. The key is to try something. You have to do something. We made a little money doing the fix and flips. For us, that was our best entry point. The next entry point is really finding your specialty, which comes with building a firm and experience and then leveraging the asset of that knowledge. Then you’ll be in a position to really be able to know how money is made. There are a lot of guys with investment money out there. They want to put it into a solid space. It is about lowering their risk and being the guy that can do that for them.
JP: It is about instilling confidence in what you are capable of?
ZF: Right. Rather than just pitching something that seems like a good idea, you can come in and say, “We have done 10 of these and this is how they perform. We got our hands dirty in terms of understanding a return on investment. We understand costs and realistic time periods.” Then you can create a pro forma that is not guesswork. It is based on actual projects and actual performance. If you have done that with clients, they can sometimes be the easiest investors to go through. Just like the realty side and the construction side, the development side is not a cakewalk. Those guys are doing a lot of work and earning a piece of the pie. They are often glad to hand over the management of that development portion into capable hands and be a passive investor. They worked their way up the scale just like we did in architecture. Being a developer is not the top of the food chain. The real top of the food chain is when you are only putting the money in. You can leverage yourself by taking on some of that role that a developer usually plays. There are so many di$erent people in di$erent places in the chain.
For more on Zeke Freeman, click {here} and also see the book Architect & Developer: A Guide to Self-Initiating Projects.