The Master Builder: Jonathan Segal Interview

Ben Stevens recently interviewed Architect & Developer Jonathan Segal as part of his Skyline Forums website. Jonathan is well known for his online course Architect as Developer and has built many notable works in San Diego, CA. See the original post and more interviews by Ben Stevens at theskylineforum.com. See more articles about Jonathan Segal {here}.

Jonathan Segal: In the late 1800’s, the architect was actually the controlling body. A client would go to the architect. The architect would hire the contractor. The architect would manage all of that stuff. That started to translate into bigger and bigger buildings to where I think the architect had less influence. That morphed into the smaller buildings where the contractor was in charge. So it has transitioned from that point to the point to where we are now where most projects the contractor is the master-builder, and the architect is hired by the contractor. That is a design-build program. Which really take all of the design elements away.

The classic example would be the World Trade Center where Libeskind was the architect, he got that commission. He won the competition outright. You see Childs actually became the architect and did it because Childs would be a “yes man” and do what everybody wanted, whereas Libeskind was trying to do architecture. I think that is a pretty simple classic example of how the architect is rubbed out of the formula now.

Ben Stevens: Was there a moment of epiphany when you said, “I could do all of these”?

JS: When I was twenty-five years old, I worked for two firms for two years each. I went to this developer and I said, “Hey, my thesis was a row house project. I would like to show it to you because I want to leave the firm and I want to be my own architect.” He said, “Don’t be an idiot. You don’t want to be an architect, you want to be a developer.” Which is crazy if you think about it. That was the “Ah-hah” moment where someone was belittling me for being an architect and enlightening me to do something different. I didn’t even think about it. I was like, “Yup, let’s do it.”

His mother owned a piece of property. It was a triangle piece of property, 7,000 square feet. He said, “It’s $50 per square foot. Give me $5,000 down and close in 5-months.” That started the whole project. I had a friend that was working at Pricewaterhouse that did a pro-forma. The pro-forma was completely wrong. But at least there were enough parts and bits that made it to the finish line where it made sense. That’s kind of how it all started.

BS: So I know you have the AIA piece, and I know you can write the pro-forma and get the equity partners. Do you do your own construction management?

JS: We do. We don’t have a general contractor. That went to bed probably near 2000. We had a contractor underbid a project and basically screw us. He walked off the job and we learned at that point that the whole process of having a general contractor is a nightmare. If you think about the project we did called The Union where basically we had no specifications, no details, no job directives, no lawsuits, no change orders, no delays. It just got so simple. We cut out fifty-percent of the architectural true work by doing it ourselves and not having a general contractor. The correspondence that goes back and forth and the covering your ass with a contractor trying to screw you by using the incorrect drawings. But the contractor seems to have ten bodies in a job shack that can basically paper you to death. With these projects, the crazy thing is that the weakest link is the superintendent. The superintendent typically doesn’t even have a high school degree. Can’t read. Can’t write. Can’t spell. Barely knows how to use a computer except for computer games. Works a sunflower seed like nobody else. This is the most important part, right? This guy is managing everything. No. We’re not doing that. If you draw it, you build it. So you’re the superintendent on site.

BS: One of the downsides of the different industries is the loss of that one person oversight. But one of the benefits, if you want to call it that, is that when things go awry, the risk falls onto different people and you are able to manage the risk. I have heard a lot of developers say, “Once we’re out of the ground, I can breathe a huge sigh of relief.” Not that the worst can’t happen, but once they’re going vertical, they have guarantees in their contract. So I am curious, as you continue to consolidate, there is not a lot of different shoulders onto which to put the risk. How have you thought about risk management, especially as your projects keep getting bigger and bigger?

JS: I think that’s a fallacy that when you have multiple parties that the risk is spread out. I think what happens is that you have people that you can go sue, and that is a bad program. For instance, we have a project called The Polk, which is getting built right now. We had a horrible horrible concrete guy. So what can I do? I can document it properly and I can go sue him at the end for delays. Or I can try and manage him all the way through and keep pushing him. Give him support. Try and get other people to work from other concrete companies that we have and supervise him all the way to the finish line. Because you ultimately have all the risk, no matter what the program is. If you can actually bring the risk down in the amount of people that you are using so that there are less moving parts, that is how we manage risk. More specifically, insurance is paramount. You must be properly insured. Everybody on the project has to be properly insured. You have to have a contract that allocates indemnity from the people that are working on your project back to you via their company and their insurance. The reality is that it is the insurance that governs. I don’t care how rich or not-rich the people who are working on your project are. They’re not going to cough up the money. The way to get their money is unbelievably difficult. So it is insurance that is the key to success there. If you have a problem, sometimes you just eat it and move on.

BS: From an asset management and leasing side, do you have your own property management company?

JS: We do. That has got to be the worst job on the planet. Absolutely just horrific. The bonus of that is, say at the end of next year I will have 250-units. If I have to hire a management company, that’s gonna cost me $350,000 to do that. Whereas I could probably have $100,000 worth of labor in the office and they can do that. There is a delta of income that is going to happen through that efficiency. We try to cut the middle-men out. And they [management companies] don’t care. There is no incentive for them to perform typically. You have a vested interest. People that don’t have a vested interest aren’t going to act 100-percent on your behalf. They’re going to go into crises management mode and maybe that’s someone else is screaming louder.

BS: Since we’re on construction, are you a fan of the competitive bid for obvious reasons. Or the negotiated contract where there is a relationship and quality? Where do you fall on that one?

JS: We need to get three bids just to understand where the true cost should be. Then we pick the person want and we try to negotiate with them. There have been situations where we have paid people more than the low-bid guy and not negotiate it. It’s just easier to have the drywall, stucco, and metal-stud guy be one-person. Where is the value? The value is… is this about money? You are already over budget. You will have to pay a little bit more. That is a classic example. The other thing that just happened was that we had a horrible excavation subcontractor. It cost us delays that we couldn’t go after. So we hired a more expensive excavation contractor that just seems to have their stuff together better and they’re doing a better job. Is there a dollar value to that? No. But maybe there is a quality of life and a grief factor that comes with that. It kind of gets vaporized and it is worth a lot to us.

BS: I heard a quote from John McNalis that said “Every building you built is bigger than the last one. You will either be the biggest developer in the world, or you will be bankrupt.” So you have found the sweet spot project size and don’t become enamored with getting too big. Talk me through that.

JS: Bigger is not better. Just because you can build bigger projects and it is more efficient. In our world, there is a certain efficiency that doesn’t happen. Then you have the job shack. You have the 15-guys in it. Greg Gator, for instance, is building our 56-unit building right now. It is 8-stories up, 2-down. He has Philip helping him and that’s it. There is no big huge printing press in there printing out job directives and RFIs. It is a very simple task. If we got up to 100-units, it would be a different story. Do I have the capital to do that? Well, let’s take that real simple here: I can build 100-units, I can go get an investor and give away half the pie. Or I can go build 50-units and keep all the pie. Remember, we’re cutting the middle-man out, that’s the concept. I don’t have the added hassle of the investor wanting to have coffee with me every day and wondering where the current accounting is. “Are you over or under budget?” Try to explain how that works. “Hey, we’re over budget.” “Oh holy shit, you’re over budget? Well, we better work through this right now.” “Slow down, we will work it out.” “No, I want to know right now how we will work it out!” There is this added dynamic of drama that goes with having investors that has not worked out well for us. It works out well for a lot of people, but I am just not interested in that dynamic. That just is not part of my needs or wants. If I can’t do it without the investors, I’m not going to do it.

We don’t want to do any fee for hired work. We’ve had people coming to us. I’ve got a guy who wants to build a 1200 foot tall tower in downtown San Diego. Well you know… you get all excited. I want to be that guy there. Then all of a sudden you start thinking of, “Who is in control here? Who is calling the shots?” Well, he is probably going to call the shots and dictate what will happen. “Well, who is paying for what? Where is the long-term benefit?” Well, the long-term benefit is that it is going to be his deal and I am going to get kicked out just like Liebeskind got kicked out. It is just wrong. It is not our business plan. You have to stick to your business plan. Stick your head down. Don’t look up. Don’t let the sounds around you start to distract you.

BS: So you became AIA and now said you were going to run some of your own deals, then got into the business of construction management and even property management. Is this primarily something where you say, “This is my path”? Or if you had a buddy who studied real estate finance and had a bunch of work in that arena. Would you convince them to go get your M.A. in Architecture and make this route as well? [Ben is confusing Jonathan getting his license with becoming a member of the AIA. He is also referring to a Master of Architecture, not a Master of Art of Architecture].

JS: Remember the premise or thesis we always start with is that we are creating architecture. We’re not trying to create business. We’re trying to create architecture. How do you do that? Well if you can control every component and actually own the business then you have the ultimate control on creating architecture. So the byproduct is you are making money but the principle notion is that you want to create architecture that changes cities. What do you need? What are the tools necessary to do that? Well, you could create architecture by hiring an architect. If you’re not an architect, but don’t go get the hack architect. Get the guy or the girl or the persons that are doing stuff that something you are proud of and something you want to do because this is your legacy. We’re not around too long.

Hopefully when the day is done, and you sit down and take a break, you can look back and you have done two things: One is that you have made people’s lives better, and cities better, and you have actually compensated yourself properly for that. If you can couple the three things, you have won. Again, the profit margin always seems to come. Not always, but most often. More often than not it does. But that’s not the premise of which we go by. For instance, if we need to clad something in and it cost more money and our bonus or our benefit or our margin doesn’t grow with that, then maybe that’s just the way it goes. I don’t want to be looking at a bad decision for the rest of my life. I would rather be looking at something that we’re proud of. That will be much more valuable than another dollar in your bank.