#362 - Steve Van Amburgh - CEO @ KDC - Developing The BEST Corporate Build-To-Suits in America

Chris Powers: Steve, welcome to the show. 

Steve Van Amburgh: This is great. I'm glad to be at the Fort company's office. 

Chris Powers: I appreciate it. For those listening, Steve and I have been good friends for a long time.

Steve Van Amburgh: Yeah, TCU, before you jump in, I agreed to do this because I admire Chris enormously. When he was in college, his work ethic was over the top, and he built a lot of student housing projects.

My son Pete, who's equally impressive as Chris, introduced me to Chris because they were in the same fraternity, and I love TCU. However, Chris probably conducted as much business as he was learning at TCU over time. I also invested in some student housing projects, which turned out to be great projects.

They all had a story, and it was fun to listen to Chris because I'd been in the business for, I don't know, 30 years. Chris was new, but you could tell he would get it quickly. And here we are—this is like the old mentor has come back to see how well the young guy's done, and he's doing great.

Chris Powers: I appreciate it, Steve. I was going to say it was in my notes. You've gotten to watch the whole thing unfold. And I appreciate you supporting me when I was young. Your vote of confidence helped me a ton. And then, with other people, if I told them Steve was interested, it would make it easier for different folks.

Steve Van Amburgh: Well, that's a compliment, but there, you already had a following. What is special is the amount of migration and growth of Fort Worth, Tarrant County, and Dallas County, as well as the enrollment at TCU, which has been incredible. And you, look at all of the student housing explosions at all the universities around Texas.

It's a good business model. That's how I was introduced to Chris, and now he's got a successful company and is doing a lot of industrial and other types of work. Pete, along with Paul and Hunter, learned a lot from you, and they're doing an incredible job, although they're a little different.

Chris Powers: I love those guys. 

Steve Van Amburgh: Well, I do, too. They're all doing a super job, and it's fun investing with guys like you and Pete because You're very sensitive about making certain that what you say is delivered. If you say it will be delivered and after a year or two, it's not, then you have to go through the negative issues to return it to a positive one. Anyway, I'm glad to be here, and I thank you very much. 

Chris Powers: Well, I'm a huge fan of the Van Amburghs, Pete, Kate, and the whole clan. And it's been a pleasure, Molly. 

Steve Van Amburgh: You've got a two, a four and a six. And they have a five and a three. So if you go down the numbers, you'll crisscross with them.

They're at Country Day, but who knows, they may all have gone to the same school here before. 

Chris Powers: Yeah. They'll run around together. All right. We talked a bit about the early part of my career, but a good place to start was when you got into the real estate industry and knew real estate would be your thing.

Steve Van Amburgh: Well, I went to Washington and Lee, and I got a business degree, which was pretty general. When I came home, back when I was growing up, and most of this is in my era when you had a summer, you might go to summer camp for a week or two weeks, but what was more important from a work ethic standpoint was, working some summer job.

From the time I was 16 until I graduated from college, I worked every summer. It wasn't optional. You made money to help pay for your school expenses. Tuition was a little, but what ended up happening was that I needed to look around. I was more focused on making dollars doing asphalt or concrete paving or working for a construction equipment company and doing service work.

I was comfortable in those fields. It was not real estate. I was not really in finance, but when I graduated, I gravitated back into the construction equipment business and went to work for Romco Equipment Company. They have a big presence in Fort Worth and Dallas.

The owner, Robert O. Mullins, was a Harvard graduate and mayor of Highland Park in Dallas. And he was one of the neatest men I'd met. He was; he listened well. He respected me. I certainly respected him. I have a good sales guy with a college degree from Washington and Lee wearing a coat and tie in class. He said he'd never seen a successful salesman who needed help understanding all of the details, specifications, and how the equipment operates. So for the first six months, I'd like you to be in the service department.

That weekend, I thought about it, and I didn't know that was a great idea, but when I went in, he gave me a uniform with my name. For the first six months, I did service work. So, I hung out with all the service people. It was very large equipment: cranes, bulldozers, and front-end loaders.

I learned how to operate them, fix them, change oil, and do whatever. I mentioned that because it taught me that if you're going to advance, you need to have a strong foundation and base knowledge, which is no different from real estate. Well, I stayed there for a while.

But then I went to work for Las Colinas to operate some of their smaller non-core businesses, and I worked for John Carpenter and Ben Carpenter. I loved it. It was a really interesting culture. Being involved with Las Colinas was something you couldn't believe you were part of.

Chris Powers: And what did Las Colinas look like at that time? Quick, what did it look like then?

Everybody knows what it's like now, but what shape was it in when you got there? 

Steve Van Amburgh: There were three or four buildings around Lake Carolyn, most of which were ranch land. There was a limited amount of residential, an industrial park, and one tech park, but the taxable value was two billion today.

It's probably 30 billion. We currently have a one-million-square-foot office campus for Wells Fargo, which is underway on Lake Carolyn. And it's breathtaking. So when you go out there, you're proud. But since I started today, there have been legitimately five down cycles.

Las Colinas withstood the first three or four, but between the third and the fourth, things slowed down, their debt loads remained, and the company went into a recapitalization. That's when I left and joined the Cole company, which was KOLL, and I loved everybody there.

It was a great company with a big California presence. After 12 years, Don Cole wanted to retire and sell the company. I was lucky enough to be selected. I built a team of other people, and then we conveyed some of the ownership to those other guys, and that's how I got in it.

I got into it from a leasing standpoint. What I quickly learned, and here's a quick story: When all the partners on an office or industrial project are sitting around the table talking about the importance of different elements of the overall project, leasing is very important, but what's important is the financial underwriting, the equity raising to get the project going, the return on cost, and what the market's doing.

I quickly learned that unless I weren't Really smart and knew how to underwrite a project, I would never be able to be the owner that I always wanted to be. So, I jumped from the leasing side in Las Colinas to the development side, primarily project management, overseeing the construction management, and I did that for three or four years.

And I've sat around tables before, and now it's funny when you understand all the components of the project, you're sort of like that guy that is at the circus, and there's, he has five sticks, and he's spinning the plates on top of those five sticks, and he has to keep them all going.

My role is to understand what's going on in each of those plates, but let others spin them and then let me make certain that I support them and help them succeed.

Chris Powers: And if you had to say a developer does all these things, like those plates would be Architecture and design, working with construction, working with the city, working with the tenant?

Steve Van Amburgh: Yeah. The five would be asset management, property management, and financial management. It’s important, but it comes after the project. So it's one of the plates, though. The first would be marketing, leasing, branding, relationships with tenants, relationships with tenant rep brokers, and making the project happen.

The next is financial management, which involves raising equity, ensuring the bank loan is good, and being sensitive to guarantees and recourse. So that's the economic aspect. The next is relationship management and tenant management.

And that takes somebody special. If you sell something and there's an issue, that company will return to you first because you're the relationship manager. I've been in that a lot, but now we have three or four other people doing an incredible job, so they'll step up and do a lot of that.

The last would be construction management and ensuring we manage the contractor correctly. So those five all work together; there is no I and team. So the team is all holding hands; you probably read that on some of the little things. 

Chris Powers: I got it on one of your cards right here.

Steve Van Amburgh: Yeah, and it's funny, one of the things is when we build a building, and we sell it, everybody that's an owner is compensated, and hopefully, it's a good return on our equity, but it's also important for us. Probably no different than Fort that, you share with everybody in the company, some portion of a fee or a bonus, whatever the percentage is 10 or 10%, 8%, whatever it is, it's important to me anyway, where if I receive a dollar, I want to make certain that somebody else that's in accounting or property management, that they get something as well because nothing's worse than some greedy manager owner, where he's not sharing with everybody that's doing the work to make it. 

Chris Powers: Okay. I want to go back to 2001. So David Cole comes in and says, I'm going to retire. 

Steve Van Amburgh: Yeah. It was right after nine 11, and Don Cole came in. And I looked up to him just like I did Bob Mullins. That was my biggest criterion: understanding who the owner was and the man he was.

Don was a wonderful guy. He went to Stanford, was bright, and was on the bank board of Wells Fargo corporate. So Don was a super guy. But his wife had passed away, and he didn't have the drive that he wanted. He also was the founder, creator, and developer of two or three very large developments in Cabo San Lucas.

So if anybody's been to Palmira or Cabo del Sol, there are just a lot of developments down there that he did all of. When his wife passed away, he spent more time down there, and after a couple of years, he met another lady. He got married, and they decided it was more fun to spend time there.

He selected me because we did have one lender at the platform level. They were out of New York, and they liked the build-the-suit model. So, we focused on building the suits. Don and the New York partner provided the financing. We quickly moved the headquarters from Newport Beach, California, to Dallas.

We also went from having a corporate headquarters with roughly 50 people in Newport Beach to having 20 here. We sold most of the California assets because it took a lot of work to understand that market when we needed to focus more on a corporate build-a-suit market. 

Chris Lee has an incredible consulting practice, not Chris Powers, but Chris Lee, Lee and Associates. We hired him, and he came in and looked at our company because we wanted, in 2003 or 2004, to make certain we would be a great company. Lee studied us, went to our office in Charlotte and Atlanta, and came back. He said that the margins you guys make and the activity and pipeline you have for corporate office build-a-suit projects are better than any other seen. You all have good relationship skills and need to be client-centric. Instead of having geographic areas of responsibility or pursuit, why don't you do a job with three or four?

Incredible marketing type people, sales type people and call on all these corporate groups that need facilities and be their facility provider wherever they want to go. So, if you look at our website, we built a hundred and fifty projects, and that's about twelve or thirteen billion.

And that, often, you get to go places you never really thought you would go, such as south of the river in Chicago or with Des Moines, West Des Moines. We've been to places everywhere except California, and we've never returned to California.

The risk of entitlements and permitting is just too much risk. You can't control the land, you don't know if it's permitted and ready for development, and the amount of money you spend, from a risk standpoint, doesn't work for us. 

Chris Powers: In 2001, you already knew you would go the corporate development route.

Steve Van Amburgh: Yes. 

Chris Powers: Corporate, build a suit. And he said, okay, I want you to take over the company. And at that point, you bought it from him, and the transaction took place.

Steve Van Amburgh: He provided the financing, and we paid him off in three years. Then, it took the other partner until 2008. And we'd agreed on a price and how the valuation would work.

We had a portfolio of roughly three to four million square feet of buildings. We ended up selling about 750,000 square feet of buildings to pay them off. So, when we started in business, we had an adequate balance sheet but needed more. Then, we had a hundred per cent lease of buildings and wanted to grow.

In 2009, we decided it was best to sell 50% of the company. And we would then keep that capital in the company. And, give or take, 100 million is what we raised through that one sale. It was, the 50 per cent went to a family office that went to an insurance company, it went to some individuals, they sat on our board, we, as a group, had 50 per cent of the board, and then the new outside group came in and, The experience with them was incredibly good.

I wouldn't trade it for anything. I learned so much from a guy named Mort Meyerson, which is the Symphony Centre in Dallas. He was Ross Perot's partner. Mort is very smart, but he's also inspirational because he likes being on a winning team. And so, from the time that he started, because our capital structure was good, it allowed us to sit down with JLL, CBRE, Cushman, Wakefield, and their tenants and tell them that we had no financing contingencies.

We would give them a bank letter. We had the equity in hand and even shared our audited financials confidentially. As a result, in 2009, 10, 11, 12, 13, 14, like. For the first five or six years, we were doing one million square feet of office build-to-suits per year, and when you consider that, the costs back then were 300 a foot.

So we were doing 600 to a billion dollars a year, distinguishing us from others because we wanted to be 100 per cent focused. It wasn't in our best interest to be doing too many things. We didn't do any retail, and we didn't do any multifamily.

We refer to that as rainbow chasing; we thought if we had a real core competency in office and corporate and industrial buildings that maybe have manufacturing and office on the front end, so all the people that we built our team around would be very proficient and, Corporate office, corporate manufacturing assembly, tilt wall. It showed, and because of that, we wanted to make certain that we were humble; we hate arrogance in the workplace, and Lord knows that prospective tenants can't stand people with arrogance, but as a result of all that, we grew. We grew our footprint, and then suddenly, we got a lot of repeat business from JP Morgan and FedEx. We would build buildings for them in places like Colorado Springs, or we're currently building a structure in Ruston, Louisiana, for JP Morgan Chase.

Chris Powers: Okay. So, what did you guys think about the word focus? We need to focus because you weren't focused. How did you get to that? Because I think it's, I've done a lot of these; it's the one thing that's easy to say focus, and the more successful you get, it's harder to do because you feel like if we're good here, we can be good everywhere.

Steve Van Amburgh: We have always been lean. But we've also project-managed and construction-managed projects. Instead of putting one person on it, we generally have two or three. And that's good insurance, and it's good we're managing our risk a lot better regarding cost overruns and schedule.

We never need to understand the multifamily business, but we do understand the industrial and office companies. So that's our focus, and if anything else comes through the door, we can make that a component of a project that we have, whether it's a retail centre, a Tom Thumb, or an H E B. We can make it part of our development and provide some of the equity, but we don't understand that, and we don't have the relationship.

Chris Powers: But you guys decided we will focus on this, and you've done it now for 20-something years. 

Steve Van Amburgh: Yeah, it's been 24 years this year. 

Chris Powers: And if you just had to say how great of a decision that was for you over all these years for somebody listening, that's trying to do lots of things at once, like how critical would you say that was?

Steve Van Amburgh: I would say it's the most critical decision that we made and that we only, for example, if you walk in the door at a top company and they have office requirements, maybe they have some distribution centre requirements, perhaps they have some data centre requirements. We stayed in that circle; they respected us more and felt like.

We were building a team of super-experienced people in the data centre and corporate office space. We have a senior VP, and she's an incredible lady and our workplace champion. So, if Deb's working at Wells Fargo right now, but she's somebody at Bank of America, for example, who needed some assistance and thought through the workplace strategy, she's over the top.

That's an extra benefit. By being focused, we can make people feel comfortable that we deliver the best product for them.

Chris Powers: I love it. All right. I want to spend some time with you. You build these mega-corporate campuses—you've done 150 of them, DFW. You're all over the country, but DFW is probably the most prolific Fortune 500 headquarters.

Folks are moving here. So let's spend some time. How does a mega deal like this get done? We could spend 20 to 30 minutes from the day you hear that X, Y, or Z company might be looking to the day they're open. I'm going through a series of questions to get us there.

Steve Van Amburgh: Yeah, maybe the one, and I can do this quickly. The largest project we've done in the Dallas Fort Worth area was City Line, which was 200 acres. 

Chris Powers: You bought that deal in Richardson, right? 

Steve Van Amburgh: Right. And that when we met with State Farm, they did not disclose who they were. 

Chris Powers: Okay, so wait, how does that happen?

Steve Van Amburgh: They had no name tags and were being represented by Randy and Craig at Stream. But at that time, they were with. I'm just trying to think of the group before.

Chris Powers: CBRE here. 

Steve Van Amburgh: No, it was a group, which was another brokerage firm. I'll think of it in a second.

Chris Powers: And you're like in a boardroom, and they walk these people in, and they say, you can have the conversation, but you're not going to know who they're with.

Steve Van Amburgh: It was even different than that. They asked Toby Grove and me to meet them for one hour at the Capitol Grill in Legacy to discuss a large project. They would consolidate and add many people and wouldn't say who it was. Our first guess was that they appeared to be more Midwestern.

They were incredibly nice people. And so we thought it was Caterpillar, and it wasn't, but we got up in front of them and went through the process:

How we're aligned together.

How there would be no conflicts of interest.

How we would not self-perform any of the work.

And we wanted to be aligned so we could work as partners.

They wanted to lease the property and invest some equity in the project. So, we thought maybe it was an insurance company or an investment company, but they did not disclose who they were. They told us that the meeting went well and that they had more questions. We gave them our cards, and they said they would get back to us within 24 hours.

They needed some temporary space, so they went in a caravan—about 20 people—and went to Richardson to look at some of Nortel Network's vacated space, about 500,000 square feet. We said we developed all those buildings. We did all of those on a build-to-suit basis. They're really good buildings.

We also have a site next door to those buildings that we have an option on. If you're interested, and the Dart stop or the dark rail, the light rail, is going to stop at our site, they actually drove immediately to that site to see if it would work. Within two weeks, we had given them a proposal.

They identified themselves and said we gave them a proposal. We then met with them, and it was more of a low-rise campus development with surface parking. They felt they needed more density, more mid-rise and even a high-rise building, and structured parking, which they didn't want.

Their employees had to park in a surface lot and come out to a car. That's a hundred degrees. From a security standpoint, they wanted the female employees to be able to park in a garage and have a little more secure way to get into the building. So, we ended up designing what's there today.

It's a 12-15 and a 15-23 story building. It totals 2 million square feet, and all the leases they signed made them part owners of the project by investing equity. But from the day we met them at the Capitol Grill and Legacy until the day we had our ribbon cutting and the president and CEO of State Farm, everybody came in; it was nine months.

So that's from design, bidding, and financing because it was 100 per cent leased, and State Farm was such an incredible credit. It was double an at that time. And because they were in the business, it was a great partnership. So we did the first 1. 5 million. And before we even topped out on the third building, we started the fourth.

So that was 2 million feet. At the same time, everything we did was transparent. We didn't do any of the general construction. Austin did a very nice job. The constructors or structure tone did a nice job on some of the improvements to the interior that the lease enabled us to do a 25-acre retail development with Whole Foods.

We teamed up with Regency Centres, a retail REIT, because that was not our expertise, just like what we talked about. It's walkable, so State Farm could walk to all those places. Then, we teamed up with three different multifamily developers. Crow Holdings was involved as an equity partner in a couple of them.

But, JLB, the Zale, Zale Carson. Now, there are a couple of others. We built 3,500 multifamily units; then, we built a building that was half a million feet for Raytheon. And what happens is when you get somebody with the quality of a state farm. Retail groups want to come. So we reserved a lot of the ground floor space of those buildings and the ground floor space of the garages because they're all podium parks where the buildings sit on top.

We have roughly 70,000 square feet of retail and restaurants. And it's been effective; it's been good. However, it took a setback with the pandemic and COVID because State Farm probably had 20 to 30 per cent in those buildings for 24 to 30 months. And it's hard to sustain a retail restaurant when the people who come daily for breakfast, lunch, and dinner are away.

Chris Powers: Okay. Real quick. Going back to that, what does a typical team look like on behalf of the client, especially for a group as large as State Farm? How big is the team making the decision to say, yes, this is what we want to do, but then decide what you're actually going to build? Is that ten people? Is that two people? 

Steve Van Amburgh: I'll tell you exactly what was in that room because there were three core groups. So when you look at State Farm, they are no different than other companies that we built for; the decision group is like a three- or four-legged stool.

So, number one is finance, which is the CFO or finance director. Number two would be HR because they want the HR group and its people to drive the development and location. Number three would be real estate construction design, probably one or two seats.

So there's usually a workplace person that says, this is what we want the workplace to look like, and in the case of state farm, if our floor plates were 40 000 square feet. If you divide that into 2 million square feet, that's 50 floors. Fifty floors is a lot of floors that are 40,000 square feet.

If you look at a million-square-foot tower, most of those floors, if it's a tower, are 25,000 square feet. So you can back into that. It would have been a 40—or 50-story building if we put it into one. But they're all interconnected. They have training. They have a lot of people, and Bloomington, Illinois, where State Farm is located, is the best training people for all of their up-and-rising teammates.

A lot of people do it virtually. So, we had 100,000 square feet out of the 2 million square feet of training space. And the audiovisual and all the broadcast stuff—it was all there. They essentially would broadcast that in Bloomington, in a room with 50 people from State Farm in Dallas, they would get their certification for some insurance underwriting. 

Chris Powers: State Farms is obviously a super sophisticated, big company. Do they generally already know all their wants and needs, or are you coaching them in those early months to help them understand what they need? 

Steve Van Amburgh: What happens is that when everybody sits, we have a planning and visioning session, and because of our experience with other large companies, we're all collaborative and sharing.

There's no opinion—it's all factual. And this is what this group is doing. The architect and interior architects are involved. We're discussing ceiling heights, base spacing, densities, and parking requirements. We didn't know the exact impact that having a dart stop on our site had; it was 50 yards from the State Farm entrance.

State Farm felt parking needed between four and a half and five spaces per thousand square feet. We ended up building 4. 7 spaces. So, 4. 7 times 2 million, just under 10,000 spaces. Okay, the top floor of all those garages has rarely been parked on, meaning there have been more shared rides, park-and-ride, or people who come.

So what was interesting was, on occasion, we would take the dart rail from our home north 20 minutes to the city line and get off and that it was a 20-minute drive, hassle-free, read the paper and that, about 15 to 20 per cent of all the state farm employees figured out that was a much better way to get to work every day.

So, it was funny because we went up and hosted a party for the top 25 brokers in town to see the buildings and the product. We hosted the dinner on the top of the 23-story building. We took DART up and took DART back. That was when we got on DART at about 10 p.m. to return home.

30 or 40 state-farm people were getting on the train to return to their homes and getting off along the way or wherever it might be. I asked them if they were happy, and they said they were beyond delighted because we provided all those different price points of restaurants that enabled them to feel like they could go to other places every day. It was a good work experience, too.

Chris Powers: Sidebar question. Can you do anything with the top of the parking garage? Does it never get used, or will it just sit that way forever?

Steve Van Amburgh: Pickleball courts would be good. 

Chris Powers: Pickleball courts are about to take over every space in the world.

Steve Van Amburgh: And they drive you up the wall because that noise is irritating.

But it doesn't upset your sleep pattern as long as you don't put lights around them where people do it at night. But, no, pickleball is a very popular sport. 

Chris Powers: All right. So they say, look, we like the space. We want to be here. We need 2 million feet. Is it now your job to hire an architect and start building a conceptual plan to bring back to him?

And by then, have you signed a letter of engagement or agreement? 

Steve Van Amburgh: Yeah. We had already hired the architect in this case, but we want to ensure that. 

Chris Powers: Before meeting State Farm or after? 

Steve Van Amburgh: No, before. But we wanted to ensure they were also happy with the architect.

So, we had a get-acquainted meeting and a visioning session. When we left, there were four architects there and probably six or eight people from State Farm. We spent two days and went to dinner that night. And everybody felt comfortable. Everyone was a good listener, respectful, and polite.

And there was no arrogance at all in the group. It was, let's do the best job for State Farm because they will take a hundred per cent of the space. Once we got through the design development, where they gave us the thumbs up, it probably took three months. Every two weeks, we would have them here, or we would go there.

I like to be involved, but we had a finance person there, a design and construction person, and a finance person who focused more on the construction side of things than the overall project. We all really wanted to ensure that the team chemistry was excellent, and it wasn't uncommon for me.

When I would get home, I would call and say, how do you think the last two days went? And if there's anything we need to work on, we can certainly work on it. And they would always say, we can't even believe how great this partnership is. So, that's what we would strive for.

On every project, we make certain that we communicate with everybody throughout the project's length, which is usually 24 to 30 months of construction. So, I think one of our four days is our monthly reporting and transparency of everything we have. We fly drones. We have two drone pilots in the company.

Go out to projects once or twice a month and fly the project for progress and safety reasons to chronicle where we were on a certain date. We don't want any disputes, and if you are careful and cautious and do your work, you won't have any.

One of the other things we always say is, This is our 34th year, and we've never had any form of litigation on any project. So you say, well, what does that mean? We're very thorough and ensure we have enough details and complete plans. And we also make certain that we run a safe environment.

And when you've got on the state farm project, we had 11 to 1200 people every day working on that project. So, we lost time, and accidents could have been avoided. And we always say when an employee of a construction company walks on our site, it's really important for us to create a safe environment where he can.

He leaves the site every day and goes home to his family. And, they work better when you reward them, at safety luncheons, for safe work; they realize that you're caring and compassionate, and we want to have that attitude by all the subcontractors when subcontractors walk on the site, that they feel better on our sites than any other site because we're safety fanatics.

Chris Powers: I will keep taking us back a little bit. So now we have the plans from day one, as State Farm said, look, here's our budget or as a company that big, like it's a range, let's see what we can get, and then we'll solidify it. Or is it usually like we can spend a billion dollars and not a penny more.

Steve Van Amburgh: No. It was fluid. We were transparent. We picked three contractors. We ended up going with Austin. At the time, their pre-construction and pre-construction pricing group was over the top. Since then, there have been two or three other good groups, too, but we would include them and say if you want a detached parking garage and the office building, it's X in cost.

If you want a podium park with the building on top, it's a longer schedule of about 60 days. You have more density and more people in a slightly more confined area, but it's a different look. You get more hype, and as we went through those, they gravitated quickly to the more expensive podium park project, but then, all of a sudden, we had like seven acres left, so our land cost was less. 

But the construction cost was a little more. Keep in mind that contractors were also partners with us, so they felt better about it, as did we. Even though we were spending a little bit more every step of the way, we would share a detailed budget with them for every line item for the entire project.

We finally agreed to the final price. I can't remember what it was, but it was probably somewhere in the 350 to 400 a foot range—maybe 400—and that included 100 per cent of everything. Then, there was the return on cost. I can't remember what it was, but it was.

It was different than today because interest rates were still much lower, probably in the two-and-a-half to three range, as opposed to four to five, like they are today. We would build it, take all the risks, have all the completion guarantees, and get the bank loan.

We were the general partner, and they were essentially a limited partner and a profit participant. And thankfully, everything finished. We take the cost overrun risk of every project. Still, we try and offset that with a guaranteed maximum contract with our contractor, and knock on wood, we've, with the contingency that we've had, we, very rarely, if ever, have had a construction bust, and the contractor partners that we team up with, we know that if it's their mistake, they'll fix their mistakes.

Chris Powers: Okay, real quick. Most people may listen to this, like building a house or something, but a change order when you're doing a home, it's okay; it's still the project stops. You have to have the architect redraw it. Something may be changing. It can cause a delay. It can cause a cost overrun, blah, blah.

Again, when I picture this massive 2 million square foot development, I'm picturing this day a few months into the project, where it's, here are the plans. We all agree with them. We're moving forward with this set of plans. How often do you get something where it's, you know what? We need another building or a massive change. 

Steve Van Amburgh: That's very commonplace. You have to be flexible. But, generally speaking, if you take a project like that, four buildings are underway there. We define them carefully based on the scope.

And what the shell condition is of those buildings. So, we have an allowance outside of that cost for tenant improvements and that, you know, from all the work you guys do. And that, let's say for a second, it's 100 a foot. Well, 100 a foot is twice 2 million, 200 million.

Okay, that is one for which there is a separate bid package. If they want to change the countertop specification, put in a different carpet, or change their lighting to more expensive or different lighting, we will make certain that they are apprised of what those costs are and that if they want to pay for them, they're going to have to pay for them.

Our motto is no surprises. If we don't communicate all those, then it's our bad. And at the end of the day, what I don't want to do is sit down and say, we made a communication error, and we didn't give you a heads up on the fact that we made a change, and it's going to cost you a million and a half dollars.

So our take is we over-communicate, and we're proud that we do. That makes sense. 

Chris Powers: Yeah. Okay. Then construction happens, everything's built, and when is your work done? How do you know that it's now done? 

Steve Van Amburgh: When the tenant occupies the space, we get an occupancy certificate, enabling them to do so.

We start the lease on a certain date, and then, from the certificate of occupancy, it's 12 months, in some cases maybe a little less or a little more. We have warranties. We ensure that the contractor and the manufacturer behind the elevators or the air conditioning stand behind the project.

Once the project has been occupied for a year, all the warning issues and claims will be minimal because we pride ourselves on doing great work. Then, we're just the owner of a building. Most of the time, the tenant prefers to self-manage the building or hire a third-party manager.

Often, the brokers are JLL, Cushman Wakefield, CBRE, and STREAM. They have project property management. We do not focus on property management mainly because we want to focus on development. So they interviewed and selected Trans Western, and State Farm selected Trans Western.

They've done a nice job. When you look at the Toyota headquarters, Liberty Mutual, and JP Morgan, they pick whoever they have strong relationships with. And then we're the owner. And then, generally, there's an option for the tenant to have a one-time ability to purchase the campus if they want.

Most companies we deal with prefer to lease for flexibility's sake and put their capital into their business. We end up owning it until our obligations are fulfilled. Then, we can sell, refinance, or do whatever we want.

Chris Powers: All right. Let's talk about the market today. So, inflation, products, and interest rates are high, but demand remains strong here. What is the state of construction in today's environment? You're building some of the biggest projects in DFW.

Steve Van Amburgh: I would say our pipeline is full, but it's not as robust or anxious as it was. There's consternation about several things, including what our price will do for the next 18 to 24 months. Can I go to our board and tell him that this project will cost three million to 300 million?

When I came back, it was 360 million, and they terminated me. Okay, so prices—when will they really come under control? The other is interest rates. If they fluctuate as they have over the last 24 or 30 months, there could be a 20 per cent delta in the lease rate that that company would achieve in the building.

And so, the other is, what's the return on cost? Suppose banks are skittish about loans on commercial offices and even industrial properties. How much equity does the developer Need to put into the project to obtain a construction loan? If before it was 20%, 25%, now it's 40 to 45%, maybe even 50%, if there's any speculative space. So, if you think about it, what return on equity does a prudent real estate investor require or would they receive?

I would say 10% as a number. Well, if you have debt at eight and equity at ten and suddenly blend it on, say, 60 40, you need a 9 per cent return to service your debt and pay your equity. Okay, that's the way it was back in the two thousand when we would make a lease, and the cap rate would be somewhere in the eight-and-a-half to nine-and-a-half per cent range.

Well, you heard that because you're in the industrial business, cap rates on exit were trading in the four-and-a-half to five range or five-and-a-half range. And that probably doesn't happen today. It's more like six and a half or higher. But what it means is getting your arms around what the value is.

If you're a construction lender at a bank, how can you tell your board that you've made a sound loan if interest rates change and you can't lease the space? Then what would you exit that building for? Even if you have 40 per cent equity in the project, I mean, so there's a lot of hesitancy, the FDIC and the federal reserve, they have put a lot of pressure on all of the banks, regional and Money centre, big banks, too big to fail banks.

As a result, it's almost impossible to get a construction loan on anything with any speculative space. Number one, if there is, it's virtually. Why would you build it if there's so much uncertainty? Why would you invest 40 per cent equity in a project when there's a 50 per cent likelihood that you might not even get your equity back?

It's probably a good time to hit the brakes, but everybody's got to stay afloat. So we focus a lot on corporate development and corporate fee work. We just finished a really large project for Raytheon, and we're looking at a number of other projects that are pretty much everywhere.

The data centre world has picked up. We have built 25 data centres for all kinds of operators and ourselves. We just finished a spec data centre with an equity partner. And that world, because of all the frenzy of AI and the amount of cloud computing space that's needed, is good for us because we're really good at project management, construction management, and helping with the financing if needed.

Chris Powers: Given the capital market situation, I'd imagine if JP Morgan came to you today. I know you did one for JP Morgan, but they wanted to build another one. They are probably the most rock-solid company in the country.

Who knows? There may be a better one. But then, let's say a great Texas bank. That's great, but they're just a regional. Would capital markets give more credit to J. P. Morgan than the regional? Or was it still in such a flux that even a great Texas bank with solid credit and J. P. Morgan would still be treated the same? How would they look at each other? 

Steve Van Amburgh: A good example is that we developed the headquarters for Frost Bank. It's in San Antonio. 

They took roughly 65%. We've leased it, just almost 90, and that's their investment grade. However, the fact that there was a 35% vacancy when we signed the lease with them required a significant amount of equity. Today, it would probably need at least 50% equity with that speculative space, so the project probably wouldn't go. 

Chris Powers: Would a deal like that give you more proceeds off the loan the more you lease it? So it's 50 per cent down on day one, but if you get it to 90, they'll advance you more money.

Steve Van Amburgh: Yeah. And it's, we call it, good news. The minute you have good news, you can contact them, and you can, hopefully, have predetermined loan proceeds. And yes, that's common, but just getting the loan to underwrite is difficult in today's market.

That's why the FDIC is closing the loan window for commercial office-type projects; it will change. I mean, I was, and you and I talked over lunch. This current down cycle is my sixth. And that if every five to six or seven years, you have a down cycle, if you're in the productive and development mode in real estate, when the down cycle occurs, If you're in that area, you're probably going to have to shift into another place like asset management or doing something else because there's not a lot of need.

So we're keeping people busy, and a lot of it is free development, but that's okay. We're happy with that. 

Chris Powers: Okay. And then, on the sale of these things, could you tell me if there is a market right now for class AA, leased, credit tenant office buildings? 

Steve Van Amburgh: Yeah. There's a market, but the cap rate, underwriting, has risen because the price of debt has increased.

If you thought you would exit at a 6% return, you're likely more likely to be in the seven to seven and a quarter to seven point and a half per cent return range. 

Chris Powers: And to get a take on inflation. Let's say that city line project; you said it was 300 to three 50 a foot or 400? 

Steve Van Amburgh: I think it's 400.

Chris Powers: What would it cost if you had to build it today? 

Steve Van Amburgh: 600. 

Chris Powers: So, is the 50% cost increase down from a high of ten years? 

Steve Van Amburgh: Yeah, 50% in 10 years. So if you do that, that's 5 per cent per year. And during the pandemic, where do we see the largest inflation? It's probably employee costs.

Labour and subcontractor costs are rising just because of the amount of inflation that they've seen, and piping or concrete steel, concrete is still rising.

Chris Powers: So if costs come down at all, are they pretty?

Steve Van Amburgh: Overall, they've trended down about three to five per cent since the beginning of the year, and they're going to come down a little bit more, just as a gut feeling.

But I also think that a lot of that reduction is being offset somewhat by the increase in labour and the cost of living. So you have to pay people more, and everything's more expensive. 

Chris Powers: Can anybody do a max bid right now in this environment? 

Steve Van Amburgh: They probably wouldn't, or they would give you a price.

It would be inflated to cover any potential cost overruns, and they really want that contract signed before they commit to the price. So you have to work hard. It means that the contractor needs to be super trustworthy, and we'll have two or three people working on every element of the construction.

Plus, if it's a tenant, take Wells Fargo, for example; they'll be in the room with us, ensuring that everything we do is what they want. 

Chris Powers: And from start to finish, if you had to pinpoint what's the hardest part of the project, what's the heart, what is KDC do so well that most people can't get done because they can overcome X? What is the hardest part of the whole thing? 

Steve Van Amburgh: The way to ask that question is, why are we good at office corporate build-to-suit development? And if you compare us to a speculative developer, we have one person on the project, have four or five, and we'll have interior people, workplace people, and design coordination.

We'll have a project manager and a project administrator who sends out a report on schedule and pricing every week. And until we get to that final G max, I would say communication is just over the top important. And you have to be very willing. It's very institutional from that perspective.

You know, most spec guys that I know and love, they're all, one of the guys was on your podcast, Bill Colley. He's as good a spec guy as there is in the world. And if you think about Bill, I don't know how many employees he has, but it would be hard for him unless he wanted to hire many people and build a bigger staff.

There's a real design of the building from the inside out. So when you have the interior person with the shell person on our team, they must agree on base spacing, structure, heights, and everything. Usually, when Bill builds a spec building, he's building it how he wants to build it for flexibility to make leases and succeed. And often, ours is more tenant-driven, where the tenants in the room help drive that design. 

Chris Powers: Yep. All right, one question on brokers: how important are they to your business? I read a quote. You said they're almost part of the sales and marketing team.

Steve Van Amburgh: Yeah, mainly because we want to gain their confidence and trust and gain the confidence and trust of the company, the tenant. And achieve that together where they know that we're aligned. When I use the word alignment, there can't be one time in the process where the broker or the corporate tenant that we are going to lease with always has to say they will share all the pricing with us.

In other words, it's different than performing something where we could pad the price or do something inappropriate. If it hurts us, it's going to hurt them. If it hurts them, it's going to hurt us. And that's a much more, what I would call comforting way. We don't have terse words or combative discussions with our tenants and relationships. And we do that if you have something that's an open issue and doesn't resolve it, then it's your fault; putting yourself in harm's way and harm's way means that you will have an uncomfortable decision with the tenant or the contractor.

And we should be smart enough to avoid that. The only way you can do it is by having enough teams to make certain that the T's are crossed, the I's are dotted, and that you communicate. In a fanatic fashion. So, to me, having a lot of people, if somebody said, golly, we have seven people on that project, we had 12 people on, on the Toyota project, we probably had six or eight for JP Morgan we had, 8 or 10 on state farm.

Everybody has a really responsible and important role. And it's not just like construction management. It's the financial aspects. It's getting the draws in on time. There are a lot of different things. Those billion-dollar projects required a lot of handholding and oversight, especially on state farms because they were so large.

We had two full-time safety engineers who did nothing but oversee the safety engineer of Austin, who oversaw the safety engineers of the subs. It was really important to State Farm, which is in the insurance business, to have a safe workplace for all our employees.

Chris Powers: All right, my final question, and I know you take great pride in working with the actual city governments that help facilitate these projects. So it's a general question, but if you had to say anything, maybe not advice, but if cities would do this, it would make life easier for them and developers as a blanket statement. Is there something that comes to mind? 

Steve Van Amburgh: If you look at the first question about the timing and the process, you think you need to get a zoning change. And that the entitlements on the site need to be modified. Before even the first meeting with the prospective tenant, you need to understand that, for example, I'll use Irving as an example.

When we get somebody on a confidential basis, we'll go to Chris Hillman, the city manager, and Rick Stope for the mayor. We'll say we have a million-square-foot tenant, and the project's probably 400 million. The site needs to be clearly zoned. We need confirmation that things can go forward quickly with no delays.

Everybody wants to know, especially from the tenants' perspective, that there's no chance of a mess up and no surprises because it wouldn't be terrible if they signed a lease and then something came back. So they're very thorough. We're very thorough. Some people have the mechanism in place, like the city of Fort Worth, which is quite good.

Okay, we've always had success with them. Other places where you see a lot of corporate development are Plano, Irving, Richardson, McKinney, and high-growth areas; they truly understand the development needs. Okay, some older places don't have the right team in place.

There are a lot of issues we haven't had. So I'm not saying this personally, but the city of Dallas has some people questioning the time on permitting and other things. And again, it's not us at all, but you can't allow delays in getting a permit. To make a top company in the country say, I won't go there because there could be a six or nine-month delay.

That's what everybody will run. So, I would tell every jurisdiction, city, and municipality that if you can't streamline your total permanent permitting process and any entitlement issues, you'll probably have people who don't want to evaluate your site. That makes sense.

And you know, California seems like it's on one end, and Texas seems like it's on the other. If you look at the end migration of people from Chicago and New York, Goldman Sachs is an example. I think Hunt Realty and Hill Wood did a great job of ensuring there weren't any permit issues.

But they worked hard in advance to make all those things happen. So, entitlement risk is the first risk that you have to maybe check the box on. If we're interested in a site, our guys will go and make certain that there's not going to be a delay or a hiccup in getting anything done because we have to represent to the tenant what that would be.

Chris Powers: Steve, thank you for joining me today. 

Steve Van Amburgh: Great. It's good to be here. 

Chris Powers: Good to be with you. Thank you.

Steve Van Amburgh: Okay, man. Thank you so much.