Arixa Academy - Paul Schon, Schon Tepler, Part Two

Arixa Capital interviews Paul Schon, Managing Partner at Schon Tepler, a fully integrated real estate development and investment company based in Los Angeles, California. Their focus is on creating and preserving value for our equity investors using their specialized knowledge of the multi-family and residential real-estate business.

In part two, Paul Schon discusses the metrics and product types their business builds to as well as long term investment opportunities they offer to their investors.

What metrics does SCHON TEPLER build to?

One of the most important ones is we try to build on a six yield on cost. So we know we’re building to a six yield on cost with realistic construction numbers, and by realistic, a lot of, sometimes, we get deals thrown at us at six, six and a half, but their construction budget is just off. So since we’re doing so many projects, we really know our costs, so with realistic numbers and realistic rents, since we’re building a lot in the same areas, we won’t do a deal unless we hit our six yield on cost. We know we can sell these between a four and a four and a half, four and a quarter is probably market right now, so that’s our spread right there. The other metric we look at – we’re all in most of our projects, between $300,000 and $350,000 a door, we just sold a 21-unit just right outside Culver City for $500,000 a door. So that’s also another metric we look at.

What long term investment opportunities does SCHON TEPLER offer?

We partner up with high net worth families to do most of our deals. Our ideal investor is someone who just wants to build good product and hold on to it. We sell some buildings but our ideal is [to] keep the portfolio long term enough because we are big believers in long term and just holding apartment buildings in LA. How it looks is we buy the land, we get the permits, we build the product with a construction loan. Once the building is stabilized, we refinance out of the construction loan, get a permanent loan – we usually get 7-10-year debt. And a lot of the equity gets returned back to the investors, so our investors are making double digit returns cash on cash. Some deals we were able to refinance 100% of the capital. Some deals, some of the capital’s left in, and they’re getting double digit returns on their cash that’s still invested, which for apartments in LA, that’s pretty good returns.

Describe the product type SCHON TEPLER is building

So a lot of the units are the same because we literally hire the same architect, same sub-contractors, and we just plug and play the same buildings. As far as construction costs, that does depend based if we’re going subterranean or if we’re building podium on grade. Also the size of the units, because a 650 square foot unit versus an 800 square foot unit, even though it’s almost identical just that extra 150 square feet, doesn’t really cost that much. So if we’re building larger units, we can build around $210 a square foot, gross. But if they’re smaller units and we’re going subterranean, we can be at $300 a square foot.

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