My First Big-Time Deal Failed. Here’s Why I’m Happy About It.

I work and invest in Boise, Idaho. You’ve probably heard of that city before, but it’s doubtful you know much about it. The important thing to know, at least for this purpose, is that our population is booming, and builders just can’t keep up with the demand for housing. 

As you know, low supply and high demand have a direct impact on the cost of living. So in response to this issue, the city of Boise uniformly overhauled most of our residential zoning code over the last winter. 

For approximately 75% of residential lots, these changes increased allowable density by more than 50%. They created new zoning districts and designations that allowed unlimited density as long as you could meet setback requirements. They created ADU regulations that allow for basically any residential lot to get a rubber-stamped permit.

New Zoning Laws Create Opportunities

There is so much opportunity for infill and large-scale developments with these changes. The city is really trying to create more density and housing—partly because they want to get the cost of living down a bit, but also, more housing equals higher tax revenue. 

Based on the new zoning, we found an opportunity to build up to 24 units on two acres in a very desirable part of town. One of the vital parts of this development was that the city required another developer who developed an adjacent lot to bring the sewer line to the edge of this lot, knowing that it would eventually be developed. 

We were able to get the property under contract, with the owner carrying a note and smaller balloon payments spread out over the course of two years. We met with an attorney to draw up our operating agreement and get our partnership and SEC filing in order. At the same time, we were working with an architect to help come up with our preliminary layout, maximizing the available space within the new zoning code to create as much density as possible. 

With these pieces of the puzzle in place, we were able to get a preliminary meeting with planning and zoning. We sat down with the city planner and our architect, and I was pleasantly surprised at just how eager the city seemed to be to help us make this project work. 

At the direction of the City Council, planners were supposed to help people make efficient use of the new zoning code and create as much density as possible. The planner helped us button up our design and even made suggestions for how we could limit easements and egress in order to create more units. 

Based on our progress, one of the larger commercial general contractors in our market gave us a verbal commitment to build out the project. The owner of the company not only gave us direct access to their project manager, but said they were interested in investing in the project themselves. We walked the property with the project manager and got suggestions and feedback from them as well. 

The Deal Hits a Roadblock

Now that we had preliminary support from the city and documents filed, we were able to start raising funds. We hit up our spheres, and we talked to existing clients and other developers around town. After a handful of live and recorded webinars, we had many investors commit to investing in the syndication based on our preliminary numbers, which were quite conservative. 

Everything was going smoothly, and we were about 10 days from the close of escrow. Out of the blue, we got an email from the city public works engineer stating that the city hadn’t planned for the density that the code allowed and that the sewer in this particular neighborhood couldn’t support the capacity for our project. So rather than building 24 units, the city would only approve one. 

As you can imagine, that changes the numbers a bit. So we spent a few days going back and forth with the city, offering some potential solutions to this issue, to which we were met with a “maybe” on all accounts. Well, maybe it isn’t a comforting answer when you are betting millions of dollars on an investment. 

We needed more time to find a possible solution or get a definitive answer about this sewer capacity issue. We went back to the seller and asked for an extension. The only way they would grant it was for us to release all of our earnest money to them, which was not going to happen when we were walking into such uncertain waters. 

Therefore, after a couple of months of effort, hundreds of hours of work, and something in the range of $15,000 spent on architects and lawyers, we had to terminate the contract a few days before closing. 

Why I’m Glad It Didn’t Work Out

That was about six weeks ago. I wasn’t happy that we had to terminate, but I was relieved and incredibly grateful that we got that information before we closed—and definitely before we took any actual deposits from investors. And what a great lesson: Everything was going well until it wasn’t, and that seemingly small piece of information completely changed everything. 

So why, do you ask, am I happy that it didn’t work out? So many reasons:

• For one, we got a very cheap education in due diligence. Many people have paid much more than we did in order to learn the lessons we learned.
• We interviewed several contract and syndication attorneys and developed an excellent working relationship with an experienced, talented lawyer.
• Several other developers in our market recommended a specific architect, who just happened to be an old high school friend of my wife’s, so we reconnected and have a very experienced teammate who already has developed relationships with P and Z, as well as the city council. In addition, he is an expert on the new city code, and is helping us with underwriting new deals based on his experience in getting projects approved.
• There were so many people in our network who I had no idea had the interest or the means to invest in something like this who made commitments to invest their hard-earned cash in our project. New relationships were forged, and it’s been so great seeing others step out of their comfort zones along with us.
• We didn’t lose anyone’s money but our own. We’ve gone back to our investors and filled them in on the situation, and that transparency has actually increased their trust in our work.
• The best part: Less than a week after we terminated the agreement, we had a better opportunity under contract, with better terms, higher density, and a closer match to the new city code. In addition, some of the surrounding property owners have expressed interest in partnering with us and expanding the project in a very significant way. 

Final Thoughts

This experience just confirms my attitude about taking action. You can read all the books and listen to all the podcasts, but unless you take action, you won’t make any meaningful progress. 

I have found time and time again in my 20-plus-year investing career that every single time an opportunity passed me by or didn’t work out, something better presented itself almost immediately. It just works that way if you keep your eyes open. 

And yes, we’ve already verified that the sewer capacity for the new project location is appropriate. I only make new mistakes!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.