EP232: Eugene Gershman Explains Why Collaboration Wins in Construction and Development

Thank you, Brad. Pleasure being here.

Absolutely. So I'm a real estate developer, primarily focusing on multifamily, single family residential projects. And my unique niche is we partner with property owners to help them develop their sites. So unlike many developers, we don't buy land ourselves. We join with somebody who already owns the land and we help them navigate the world of development. We put together the teams. The design, engineering, architecture teams, we bring in all sorts of consultants from geotech to lawyers to investment bankers. We help fundraise for the project. We manage construction and then we manage the exit, whatever that may be. If it's for sale, we manage the sales process, bring in the realtors if it's for rent. that we put together a property management team and oversee the lease up, refinance, and all those things. So full scope development that we do for owners who already have the land. structured as a true joint venture. So we do share the risks and the upsides. We take the ownership position by essentially reinvesting our profits as equity into the deal. And that's how we get things done. I've owned a construction company for many years. It's been an interesting ride with lots of ups and downs. So definitely have a lot in common with traditional builder developers, general contractors, things like that.

much. Yeah, we can take care of the process from the beginning to the end. We can identify what is the highest and best use of that land. We study the code. We meet with the municipality, if it's city, county, whatever the jurisdiction is to navigate the hurdles and the codes there. And yeah, we put together the team, but absolutely.

Yeah, I love that question. For the last 25 years,20 plus years, we've been primarily in Washington around the Seattle area. Recently, about a year or so ago, we started broadcasting our message that we are that unique developer who partners with owners. And the phone started ringing from all over the country. We've recently started a project in Idaho. We have submitted a proposal for a deal in Texas. We're looking at deals in Tennessee, in Florida, in California, in Oregon, pretty much all over the country. So, you know, yes, traditionally I'm based in the Seattle area, but we are capable of doing deals anywhere in the country. We decided to shut down our construction company, which really disconnected us from the locale. We no longer have to work on a project where we live because we could go anywhere else. And we actually prefer working with local consultants, local contractors who know the area, who know the people. And that way we could be more successful.

So we become a joint venture partner. So the way we would do it is we would set up a standalone special purpose LLC where we are one of the members, one of the partners in the joint venture with the original owner. In most cases, we need to fundraise and bring in additional limited partners into that LLC. Our company is a manager of that LLC. We're the manager of the project. And then this LLC is now the owner of the property. And so the owner would contract with the general contractor. We would be the manager of the owner entity. So we would do construction management. We would oversee the construction. We would review all the draw requests. We would review all of the contracts and sign them, change orders, you know, everything that an owner would do. But we're not a GC ourself.

Absolutely. Absolutely. We love contractors. We work with contractors a lot. Every time we go to a new area, we have to build relationship with general contractor because they're the ones who are actually going to be building the project. So, yes, absolutely. Feel free to reach out, get on our list. Would love to be in touch. And also, a lot of times, owners. Call contractors about possibly building something. And I've been in those shoes before. An owner calls in, asks for a bid. They don't have any plans. They don't have any permits. They don't have anything, but they want to know how much is going to be. And not just how much is going to be to build, but they want to see a bid. Most contractors would laugh at that because nothing's designed. Right. Please. Call me and tell me that you're working with an owner like that. I would love to get in touch with them, and I would love to be the professional representative there to actually bridge that gap and explain to the owner what needs to be done, build the project properly, and involve the contractor early on so that we could do proper pre-construction services, estimates, and design the most efficient building.

Yeah, pretty much. Right into bankruptcy. All

I see the work of contractors as true collaborators on a job. I personally have made that mistake in the past working with the subs when I had my own construction firm where we would go out and like you said, get multiple bids, pick the lowest bidder. And every time we would do that, it would bite us in the butt. I prefer working relationships from the very beginning. The way I vet my teams is I see what their capacity is in terms of human capital, if they can physically do the work. I check what they have done in the past, and have they built similar size and scale projects before? And I ask them to estimate their general condition, general requirements. That's really all I need to know. I don't need a bid from them to deliver the product because... especially when we're early on, we don't know what it's going to be. It hasn't been designed. It hasn't been engineered. There's so many variables. I would love to get their perspective on what a similar project cost them in the past. That would be super helpful. And I would love to have their contractor's fee spelled out. That's really the only thing that you can negotiate with contractors is the fee. Are you happy with what they're proposing or not? Compare it to others. If somebody is offering a lower fee, understand why it's lower. But just because somebody says they can do it for $20 a foot versus $30 a foot versus $300 a foot means absolutely nothing because it all boils down to what it is actually we're bidding on. What I like to do is I like looking at very detailed scope of work. I like to make sure that my plans are... very well detailed and my specifications are very well detailed. That's the most common thing that's missing is that you see a bunch of lines on paper and you don't know what material actually goes in there. And that's where we see most mistakes. And I'm teaching all of the owners that I'm working with is I don't care how much your contractor says they're going to charge you for it because you might be talking about two different things. They're assuming that they're building A and you're assuming that they're building B. And unless you drill down to the very fine details of what it is actually included in the price, it means nothing. And so I think that's the biggest advice that I could give us when you're hiring a contractor, make sure you like the people. That's my thing. When I go out to hire GCs, I literally tell the guys, look, I want to know that I could go out for drinks with you after work and talk about sports, families, politics, and... go back to work the day after. If you don't have that relationship with people, if you don't trust them, don't work with them.

Absolutely. Yeah. Things always go wrong and you have to be prepared to discuss it and address it and figure out a solution. It's just the way this industry is. Yeah.

Of course, of course. And I mean, we had lots of problems in the construction site, on construction site. Usually it stems from something being unknown and new information coming together and then change orders happen. And then that's when the finger pointing begins is who screwed up? Why is this a change? Why is this costing me extra? Understandably, contractor wants to cover their expense. Understandably, owner doesn't want to pay for it because they assume that it should have been known. And many times it comes from the whole notion that either the plans weren't developed very well, and when you agreed on a deal, you didn't know what exactly you're agreeing on. Or a change happened and it needed to be... A decision needed to be made quickly in real time. And even though your contract does say that they have to get a written change order signed before they bill you, in many cases, they get the fix, get it going. And yes, bottom line is the owner is responsible for it because there was not a known fact, not a known issue. And I've been through litigation before. I've been through so many arguments before, through mediation before. It comes down to... If you got the value, you need to pay for the value. But it usually gets to litigation when the relationship is not there. Most issues, most conflicts could be resolved at the table or on the construction site the day of, the day when that issue happens. If you think that you could just close your eyes, hide your head in the sand and avoid it and kick the can down the road, it's always going to. bite you in the end and going to cost you more. So that's why that relationship, if the relationship is not there, the resolution will never be found. And conflicts will always happen. I mean, it's construction site. It's a bunch of guys who are overworked and angry. And I'm sorry, it's just the truth of life.

Absolutely. Well, and in that example, what I like doing is I like having a group of subs because a lot of times the same electrician that you love is not available on the next job. So I always wanted to have at least two or three that I could send the bids out and they would know that they're on a short list of two or three subs and I will rotate it just because I need to keep relationships with multiple companies. I need to be sure that next time I have the job, if you're unavailable, I'm going to go to the other guy. Yeah, there's been cases when I get multiple bids and one is an outlier. And if that's my preferred vendor, I'd sit down with them and say, look, you're an outlier. What's happening here? And we'll level the bids, right? You have to know what's included. Is it the fact that they are so busy that they're throwing in 30% markup on things? Possibly that happened before too. And I'm happy for them. But if this other guy is willing to do the same work for less, then they would get the job. But it doesn't mean that it would be a way for us to verify the bid and our subs would know that they're being compared to others. But nonetheless, it's still a short list and they would know that they would get the next job.

I mean, it was more of an art than science, I'd say. I think the short answer is yes, we did have preferred vendors for some of the trades like excavation. Like we had an electrician who was actually a friend that we would typically go to. We'd had a... a mechanical sub that we would typically go to, but they always knew that they're being checked and that we have another sub bidding this. And in some cases, yes, we did have to go with somebody else because like you said, if you ask the same guy to bid multiple times and never get the job, then they'll stop giving you the price. It takes time. It takes a lot of effort to estimate the job. And the more complicated the project is, the more time it takes. So yes, I can totally respect the fact that You know, if you bid with the same contract, the same owner multiple times and they didn't choose you, then what's the chance that you're going to get chosen next?

First thing I ask is what other projects they've done before that are similar to mine. That is probably the most important thing. I need to be sure that they've built similar size and style projects as the one I'm working on and for how long. Then I would typically, if it's a commercial job, it's easy to find who the developer was. I would typically call the developer and talk to them and ask them how the relationship went. What were the problems? What were the good things? And see. you know, see what feedback I get. If it's a smaller residential job, you might have to ask for references. Personally, I don't like references too much. One of my candidates, employee candidates, once said after we finished the interview, we asked him for references. And as he's leaving the conference room, he's like, oh yeah, no problem. I'll find three people to lie for me. So that line stuck with me about the quality of references you typically get. So I try to do independent research. With residential jobs, you could search online. There's probably going to be a bunch of online reviews and, you know, scan the bad ones, see if you can find out more information. That could be helpful. But most importantly is how long they've been doing this, how many projects they've built like that. That's the main thing that I look at. And then I typically ask them for their estimate of GRGCs, general requirements, general conditions, and their contractor's fee proposal. So I don't even care what their line-by-line estimate is because I will drill down to those numbers. I will look at their subcontractor bids once we're ready, once we're beyond that selection. Because I want that contractor to be by my side from day one. From the day architect's pencil touches the paper, I want that contractor to be there with me to help me estimate. Yeah, that makes sense. And before the project is designed, it makes no sense for them to bid. I'm curious about their previous costs on similar projects that we could use for our budgeting purposes, but that's not going to be my criteria for choosing them. My criteria is going to be their fee proposal, their GCGR estimate, and I just want to see how they build it. I want to see how much fluff they put in there. you know, how much general overhead they try to attribute to general conditions and what their proposed fee is or markup on things. Gotcha.

It's risky. It's risky. I mean, I have seen, I mean, hell, I've done it myself when I would take on a job bigger and more complicated than anything I've done before. And the way I would explain it to investors, to lenders is, yes, maybe my company as a company hasn't done this before, but look at the people that I brought to the table. My project manager, superintendent, project engineers all had experience building something that we're trying to build. And that was my excuse. So I kind of look at it through that lens a little bit by giving them a little bit of a benefit of the doubt. And I guess it depends on the market cycle. Right now, when I know contractors have a lot of capacity and availability, I would like to choose the one who has done this type of project before many times. You know, a few years ago. When it was really hard to find contractors, it was very difficult to find subs. You know, pre-COVID, then post-COVID, you know, when we had that boom, it was really hard to find people. It was really hard to find subs. And you kind of have to settle for what you can get. I could maybe deviate from my rule. You know, today I'm choosing a contractor for a new project and I'm doing exactly that. I want to make sure that I'm comfortable with those guys. I want to make sure that the meetings that we have are not awkward. that they're not forced, that we can have a casual conversation over beer and be relaxed about it and have a good understanding of our sort of general principles on life, general ways that we solve problems. I think those things are more important than anything else.

Exactly, exactly. Or find another solution. That's why I like having contractors. at the table early on. Architects are notorious for trying to design crap that would never work because they're all, not all, but many of them try to build a monument for themselves and try to win an award in a magazine. But bottom line is we need to make sure that the project not only looks good, but is also making us money, right? And so having a contract to the table is super useful because a contractor can say, look, there's no brick masons available. But if we could substitute this with, I don't know, a panel of some sort or a different sighting, it might have a similar look, but we can get it done faster and for less money and then bring it to the table. But that's the type of the conversation. Those are the type of relationships that I love having. Yeah,

I think the most important part about building a business in general, I mean, I know a lot about real estate business. And of course, real estate is very recession sensitive in most cases. But I think the main thing about most businesses in general is leverage and ability to drive the business and drive the revenue stream while the economy takes its cycles. In real estate, leverage is quite simple, the debt that you take on. If you are very highly leveraged and your equity percentage is small and your debt percentage is very high, you are very much dependent on those cycles, economic cycles. What happened in the last few years when interest rates started rising, after a long period of growth, lenders got complacent, borrowers got complacent, and so we were taking out huge loans. Our loan-to-cost ratios were extremely high, sometimes in the 90%, sometimes 95%. I've even seen deals at 100% loan-to-cost. Like literally a lender would finance 100% of the cost of your project. Well, what happens is, what happens when the interest rates started going up? You finish your project that you took out this huge loan for, interest rates went up, you need to refinance, your proceeds aren't high enough to cover your construction debt. And that's when businesses collapse, that's when projects collapse. When you talk about... general business cycles and protecting yourself from recession. The biggest lesson that I've learned and the rule that I started following in the recent years is to not undervalue the importance of marketing and sales. What I've been focused on for many years of my career, because I grew up in a construction family, my father was a contractor, that's how I... Got to real estate development. I joined the family business and we started developing projects of our own. But we always grew organically. My dad knew how to build and he would pass the knowledge of construction. What does it take to get things done? What does it take to actually put the product together? And that's been my focus. Even though I studied business and economics, my focus was on how do we build the widgets? And not until recently, Even though in business school, yes, you take marketing classes, it's pushed down to you. But as a kid, learning that stuff, you're like, okay, whatever. And then you get to real life and we never had to market. But that's how the businesses grow. And I think that's the most important part. You can't forecast what's going to happen. I mean, maybe to a certain degree. There's some very experienced economists that I follow that I... trust and I try to adjust my way of thinking based on what their forecasts are. But the bottom line is you have to make sure that your business is generating revenue. And that's the most important rule.

You have to make sure that you are marketing. your business when the times are good so that you could build the habit of generating revenue, of generating leads. How do you acquire new sales? How do you acquire new customers? How do you grow your business base? That is a very key component. A lot of times it could be half of your overall company budget is that new business generation, whether it's lead generation, whether it's social media marketing, whether it's podcasting or traditional advertising, whatever the business model is, you have to hone that skill when the times are good, because when the times become bad, usually what happens is when businesses are trying to cut down costs, they terminate their marketing budgets or they cut down on their marketing budgets. And that's the opposite of what they need to do. That is what they need to. focus on that when times get tough, when the economy slows down, when interest rates go up, when, I don't know, tariffs kick in or whatever the cause of the next slowdown is in your niche, you have to be prepared with a well-developed system for acquiring your business.

Absolutely. That's exactly what happened. I mean, we made that mistake. We never really had a well-developed marketing system. We have tried things here, we have tried things there, but we never really had a very good system. When things got tough, we... focused on delivering the projects that were in the pipeline. We were focused on trying to find financing, trying to find ways to get those projects, you know, out of the water. And that two or three year period of time almost killed the company because we had no future revenue. And so when the projects got done, we had nothing. We had no future pipeline. And it was tough. We lost all the people. We didn't even, we barely had to lay off anybody. Employees saw that there's no future pipeline and they quickly drifted off and found themselves new jobs and moved on. And so, yeah, absolutely. That's, if you have the formula of how much you need to spend in order to generate new business and you have your ratios of, you know, if you spend, like you said,5,000 and that gives you, you know, seven sales or whatever it is, then, yeah, you have to maybe put some money aside for the slow times so that you could then increase your marketing budget. And every business is different, right? That's what we were struggling with. We didn't know how to market, how to acquire new business for our company. And that's when, you know, when the times became difficult, when the economy slowed down, that's when we got hurt.

Yeah, I mean, I smile when I hear tips like that. Yeah, large companies that have been around for a long time that have big cash reserves, it'd be nice to have. Sure. Many smaller businesses would be like, well, great, I don't have that. Right. I mean, your typical sort of business school solution is to have at least... two or three months of reserves. You have to calculate your current ratio. There's multiple ratios, CFOs like tracking to make sure that the business is stable. I frankly don't remember them all. But yes, all that is important. If you can do something like that, that's obviously going to help. If you can have some cash reserves set aside, that could help you ride out the recession. That's great. But then you also have to realize that the slowdown you might experience is not temporary. I mean, if you're involved in, I don't know, I can't think of a good example, but if you are selling a product that gets replaced with something else, you know, take AI, for example, you're selling a product or a service and all of a sudden... AI comes along and you think that you're experiencing temporary slowdown, but what you're experiencing is slow death because your product is being phased out. So you have to be able to recognize and pivot if you have to, because the slowdown might be not just a sign of a global event. It just might be a sign of your business being replaced with something else. But leverage is another thing I mentioned before, or debt. So that's one thing you have to be very careful about is when you're operating a business, make sure that the loans, the operating lines of credit or any other kinds of debt that you have, make sure that they don't kill you. Because if your revenue slows down, but you still have to pay off the loan that you took, how are you going to handle that? How much can you afford to lose? How much business can you afford to lose? Or how much revenue can you afford to lose before your lender start knocking on your door? So that's an important thing. You know, you can always lay off people. But if you owe money to the bank, there may not be another solution.

Exactly. Basically, I mean, yeah, trucks, equipment, contractors love leasing their equipment and leasing their brand new trucks because, you know, the new superintendent comes in and they wouldn't take the job unless they got a brand new truck. And so you go out and you lease a brand new truck and you're like, I don't care. I'll just pass it through to the client. Yeah. With. with my general conditions great you can do that but what happens when the job when the job ends or what if the job stops midway what if your client faces challenges and cannot proceed now you got this truck that you have to keep paying for and you can't sell it because it's a lease and you're stuck with it what do you do and if there's no new job that you could reassign it to it drains your wallet

I mean, unfortunately, but you do need to look, you do need to have tools that work. And if you're driving an old beat up truck and it fails on you when you need to show up, that's going to cost you a lot more. Sure. But there's, you know, there's a happy medium. There's a fine balance. Yeah,

Yeah, I typically look at inflation. I typically look at GDP. I look at. you know, just basic stock market. If you want to listen to something that's more understandable for a layman, look up ITR Economics. They have a free blog. They have a free podcast. They're podcast episodes. I think they're once a week or twice a week, and they're like five to seven minutes long. Apolitical, they're just tracking the data and they're doing forecasts. It's probably the easiest one to digest and understand. But yeah, interest rates, you know, yesterday, obviously, we saw that interest rates stayed the same, which is an interesting economic indicator. You know, always watch the Fed decisions. And, you know, it's important to see what's happening with fiscal policy. You know, people get excited or mad when whatever party of choice for them does something. regardless of your politics, whenever change happens, how does that affect the economy? If it's going to increase government debt, then you have to figure that there's going to be more cash circulating in the economy that could stimulate growth on the one hand, but that could also... increase inflation on the other hand. So you have to balance the two. And again, regardless of whether you think they're doing the right thing or the wrong thing, what you need to make a decision for yourself is how's that going to impact your business?

sure. For sure. Yeah. I mean, you can't, you know, nobody has a crystal ball. You know, right now, a lot of contractors are trying to figure out what to do with the tariffs. Right. And are they going to impact them? Look, you don't know. Nobody knows. You know, you wake up in the morning and there's new news about some trade negotiation. And that's going to change things. You can't rely on that. You have to work with the information you have. You have to make certain assumptions. You have to factor in some contingencies and live with that.

Exactly. Exactly. Well, before we know what's the actual impact going to be, you know, when... They first started talking about these massive tariffs. A lot of people freaked out. But then you kind of have to slow down and see how it plays out. Well, it's becoming apparent that the tariff talk is an excuse to get other countries to the table and to discuss the trade relationships. Right. Okay. So now that we know that, it doesn't mean that there are going to be no tariffs, but... the impact of those tariffs isn't as dramatic as some people feared in the beginning.

Oh, that's a good one. I mean, I like talking about real estate and what to do with undeveloped land. Because I get that question all the time. I get people call me, especially brokers, real estate brokers call me all the time. Sometimes owners call me and say, I've got this great piece of land. You should totally buy it. And it's going to be a great development opportunity. And my comeback to them is, if your land is so great and you have such a great development opportunity, why are you selling it? What are you going to do with the money after you sell the property? And in many cases, they say, oh, I don't know, probably reinvest it, probably buy some other piece of real estate. And then I say, well, if you're going to invest in real estate regardless, why not double down and reinvest into your property? So my motto has been for the last several years, do not sell your land, develop it, because there's so many opportunities. And to contractors out there, when you see opportunities, first of all, Figure out for yourself, are you a contractor or are you a developer? And it's fine to be both. But in many cases, contractors take on the role that is not native to them. And I like to say, look, bring somebody who is, I don't say hire me necessarily or bring me in a deal, but bring in a third party that could bridge the gap between your inexperienced owner and your construction expertise to be maybe even just the owner's rep. Somebody who is experienced as a construction manager who can guide the less experienced owner through the process. Because honestly, it is a pain in that butt to deal with an owner who doesn't know what they're doing, who doesn't know what questions to ask. And unless your goal is to take advantage of them and take as much money from them as possible, which I would never recommend. But yeah, that's probably my last thought is my motto of don't sell the land, develop it.

The one that I would recommend, I really like Chris Voss's Never Split the Difference, you know, great book on negotiations. I've reread it three times now. I also like Daniel Priestley's Oversubscribed and Key Person of Interest. You know, we talked about marketing and what it takes to build a business. really breaks it down into the different stages and what it takes to promote and to build a business. So those will probably be the ones that I'd recommend.

Daniel Priestley.

Thank you, Brad. Yeah, it's been a fun conversation. I enjoyed it.

On social media, pretty much everywhere. I'm mostly using LinkedIn a lot. I have a lot of followers there. A lot of people contact me. So just look me up, Eugene Gershman on LinkedIn. Otherwise, my website, GIS. companies in plural dot co no m there gis companies dot co