Risk, Return, and Where Our Projects Fit
Every investment involves a tradeoff between risk and return. In real estate, that tradeoff is often shown as a ladder, with each step carrying more risk and a higher expected return:
Core: stable, fully leased properties
Core-plus: mostly stable properties with light improvements
Value-add: renovating or repositioning an existing property
Development: building something new
Our projects don't fit neatly on that ladder, and the reason comes down to how "development" is defined.
Two kinds of development
Much of development's risk sits before construction begins. The key difference is the type of approval a project needs:
Entitlement-driven development depends on discretionary approvals, such as rezonings, variances, and special use permits, that go through public hearings and council votes. These can take a year or more, and approval isn't guaranteed. This is known as entitlement risk.
VS
By-right infill development, which is what we do, builds only what current zoning already allows. Approvals are administrative: city staff review our plans against existing code. We still build from the ground up and take on construction and market risk, but we don't depend on a rezoning coming through.
Because of this, we aim for returns similar to what development typically targets while carrying a risk profile we believe is closer to value-add work.
What's reduced, and what isn't
Entitlement risk: largely removed. We build what current zoning allows.
Construction cost and schedule: reduced. We handle construction and project management in-house, which cuts down on handoffs and helps us address issues early.
Valuation: managed. We underwrite conservatively, building margin between total project cost and projected value.
Timing and market: still present. Construction costs, interest rates, and buyer demand can move against any project, including ours.
The catch: timing
The biggest factor we have to get right is timing. Annualized returns depend on how much profit a project earns and how long it takes to earn it. Time is the denominator, and it often matters as much as the dollars.
Consider a $100,000 investment that earns $20,000 in profit:
Over 12 months: roughly 20% annualized
Over 18 months: roughly 13% annualized
Over 24 months: roughly 10% annualized
The profit is the same in each case. Only the timeline changes. Keeping design, construction, and project management under one roof, along with our local experience and relationships in Durham, is what allows us to hold tight timelines and anticipate delays before they happen.
How investors are positioned
Limited partners receive their preferred return first.
Their capital is returned in full before we share in any profit.
Remaining profit is split according to each deal's terms.
Because we raise capital project by project, terms reflect each deal's risk and timeline. Recent offerings have included preferred returns from 8% to 15%.
The bottom line
By-right infill doesn't remove risk, but it removes one of the largest and least predictable sources of it. Paired with disciplined execution and a tight timeline, that's what allows our projects to target development-level returns.
DISCLAIMER: This article is for informational purposes only and is not an offer to sell securities. All returns are targets or projections and are not guaranteed. Past performance does not guarantee future results.
