A 20-year friendship turned into a business partnership when Nick Earls and Eric DiNicola started building condos. They found an opportunity and converted office buildings into apartments. Nick and Eric are giving us the inside scoop on the top three qualities to look for in an office building, the pros and cons of construction on existing buildings vs. new builds, and the one thing to look for in your location.
Nick Earls and Eric DiNicola Real Estate Background:
- Full-time real estate developers and investors
- Focused on multifamily as well as condominiums
- Developed over $56 million of real estate with an additional $40 million in upcoming projects, most of which are luxury condominiums
- Based in Boston, MA
- Say hi to him at: https://winterspringcapital.com/
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever. We don’t get into any of the fluffy stuff. With us today, Nick Earls and Eric DiNicola. How you doing, Nick and Eric?
Nick Earls: Doing great. Thanks for having us on.
Eric DiNicola: Doing really well.
Joe Fairless: I’m glad to hear that, and it’s my pleasure. A little bit about these two—they are full-time real estate developers and investors that focus on multifamily, as well as condominiums. They’ve developed over $56 million worth of real estate, with an additional 40 million in upcoming projects, most of which were and are luxury condominiums. Based in Boston, Massachusetts.
With that being said, do you two want to give the Best Ever listeners a little bit more about your background and your current focus?
Nick Earls: Sure. So, our background – we started in 2015. I’ve been in the industry, I started as a real estate agent since 2011. I come from a construction background myself. Eric and I have been friends for almost 20 years now, over 15, and we kind of always wanted to start a company together; we saw an opportunity and a really strong condominium market in Boston, and we started this company. We’ve been building condos ever since, it’s still one of our main focuses. We’ve also started to branch off into affordable housing development, and we’re also doing some office conversions, old offices, into new apartments.
Joe Fairless: So, office buildings into new apartments. What does that entail that a typical development—let’s say, if you’re starting from scratch, what type of challenges does that entail, that a typical development starting from scratch wouldn’t?
Eric DiNicola: Well, it sort of depends on the location, the city you’re operating in. We’re focusing — most of our luxury condos, ground-up construction have been in Boston, whereas this strategy is… We’re looking at sort of some satellite cities or cities maybe not Boston, but near and sort of outside Boston. And the differences would be, you already have a pre-existing building, so right off the bat, you’re eliminating a lot of construction cost with sort of what your listeners might consider the shell. You have a foundation in place, you have walls, you have a roof. Now, if you really got it down, and you’re taking out all the internals, you’re saving, based on what different contractors have told us, what we’ve seen kind of coming to an average, I’d say you might be able to cut 30% to 40% of your costs out, your hard costs. So, that’s one aspect of how it differs.
Another is you might have one of these cities or municipalities that you’re working in, where they sort of encourage that. They might have old outdated office buildings that are very vacant, maybe very low occupancy rate. Maybe they are in a zone that doesn’t allow residential as of right, but they’re willing to work with developers to give a special permit, because they see it as a way, “Okay, maybe our population is increasing demand for this area is increasing, but we don’t really have the housing stock to support it”. This could be a way to turn underutilized assets into something that is more of its sort of highest and best use.
So, a couple components are it’s cheaper construction-wise, even if it’s sort of more tedious inside than just starting fresh to work within a given shell, but it’s also dependent on where you do this. You might have cities, municipalities who are more favorable to this type of strategy and almost willing to work with you rather than against you, which we do kind of see a lot of times with ground-up development.
Joe Fairless: Yeah, what an opportunity for right now, especially… Because you don’t have be paying too close attention to what’s going on in the world to realize that office is hurting, and apartments are flourishing, because of the work from home movement, and just all the reasons why apartments are flourishing, affordable housing, etc. What, as a listener who is hearing, “Wow, 30% to 40% of my costs are decreased relative to if I built this brand new, so I need to go find some vacant or distressed office buildings.” What should we be looking for when we’re looking at office buildings with an eye towards converting them into apartments?
Nick Earls: One of the things that we focus heavily on is transit-oriented, and Eric mentioned, we look for satellite cities. So, we’re looking for cities that are kind of orbiting a more major city. So, a lot of these people that would be living in these apartments would be commuting maybe to a Boston or whatever major metro you’re talking about. So, transit-oriented is very important to us.
Another thing that we focus heavily on is zoning. As Eric mentioned, a lot of these zoning codes are outdated, and bad city planning from decades ago; maybe it was appropriate back then, but it isn’t anymore. So you’ll look at a building, you’ll say, “Well, I can’t do apartments here”, but if you dig a little bit deeper, and you try to figure out, well, what does the city really want? Maybe they don’t have the political will to completely overhaul their zoning code, which is a pretty big process, but they’re encouraging you to do this, and you can get a special permit, or you can get a zoning variance, and title, in some way, it’ll be different from municipality to municipality, but they’re encouraging it, and there are a lot of different aspects to it. Like, one building we’re focusing on right now, we’re in our due diligence period – it’s in an opportunity zone, and there’s a potential for historic tax credits. So, you want to look for all these sort of ways that you can stack up beneficial things on your end. The city wants it. It’s transit-oriented. There’s potential for tax benefits. Look for properties like that, I would say.
Joe Fairless: Why does it matter if it’s transit-oriented? Because that kind of flies in the face of so many people working from home now.
Eric DiNicola: Well, it’s still a focus we’re seeing. We’re still seeing cities wanting that, and you can kind of align it with the parking requirements as well. A lot of our new development condominium projects in Boston will get pushback from neighborhood groups, the city, if we don’t have at least one parking space on site per unit. Now, what we’re seeing with a lot of the office conversions, and even though what you just said is very valid, a lot of people are working from home, there’s not space to—because it’s an existing property, of course, I mentioned the shell aspect… There’s not really space that parking. But if it’s near a train station, especially if these people are still commuting, because some of them are, we are still seeing that – they’ll be able to have within a very quick walk to a train station or to a bus station, or it’s just in a location where there’s a lot of economic activity within walking distance. So, we’re seeing that sort of the trend with some of these conversions. They’re not requiring — especially if it’s rentals, which these are, they’re not requiring one spot. They’re even requiring maybe “Okay, as long as you’re within X amount of feet of a parking garage, you don’t even need to have any spots on site”, giiven that we consider this a transit-oriented development, and that it’s also near a train station. So, yes, we’re noticing more and more working from home, but we’re still seeing a segment that is traveling in for work and does utilize public transportation, and we’ve seen that kind of pick up again, at least in Boston… Maybe not to pre-pandemic levels, but certainly to higher levels than it was, say, a year, a year and a quarter ago.
Joe Fairless: Remembering now, or I’m just making sure I’m being aware that – you two are in Boston, right?
Nick Earls: Correct.
Joe Fairless: And, I lived in New York City for a decade, so I get the North-East, how dense it is from a population standpoint… And now I live in Ohio, and I’m from Texas. So, I guess in my mind, I was thinking less North-East, because train stations, and I’m in Cincinnati, and that’s not a thing… And when you mentioned office buildings to apartments, my mind immediately thought of these huge office buildings in office parks, in and around Cincinnati, that are ghost towns. And I know that you were talking about the certain criteria that worked for you right now, but have you ventured into a project outside of the North East, and more in the Midwest or South or Southeast, where you’ve done that type of conversion of office to apartments?
Nick Earls: We haven’t. Our development has mostly been in our own backyard. We’ve looked at a lot of out-of-state investments, but not of that type. To give a little more background on the type of office conversion that interests us, we’re looking at kind of mixed-use sort of buildings that are in the major corridors of, as you said, densely settled cities. A lot of these buildings were built in the late 1800s, early 1900s. They’ve, even pre-COVID, and all these what’s been going on in the office space, they were underutilized parcels, probably going back 20 years. They had excess vacancies in the office. The retail does well. And what we see in city planning now as developers, especially in this area, where it’s densely settled, is mixed-use with first floor retail, and then the upper floor is residential. Maybe you have a second-floor office, and then the upper floor is residential. That’s very encouraged, because it’s smart city planning, less traffic.
Cities want transit-oriented, as you said, because it’s densely settled and the traffic here is a nightmare. Commuters are moving into the city, they are moving closer, they’re moving into more affordable areas where they can just hop on the train… We know some luxury apartments where they only have a parking ratio of 20% parking spots to the amount of units, because most people don’t even have a car. So, it depends where you’re building.
Just the way you described it, where you said it’s a ghost town, if I was venturing into an investment like that, I would be looking heavily at population growth and the local economy just to make sure “Is the office park a ghost town, or is the whole area ghost town?” That would be the thing that would worry me.
Joe Fairless: As far as the buildings go, you mentioned just a little bit a moment ago about the year of construction, but what are some other must-haves for the actual building itself?
Eric DiNicola: Well, I would say the year of construction – I know Nick mentioned that; it’s not necessarily good or bad to us in terms of if it was 1880 or 1960. There’s obviously some changes that took place over that time in terms of how buildings were constructed, but a lot of the ones we’re dealing with, they’ll be brick buildings. A lot of times they’ll have a look of that era of the early 1900’s. So I guess certain things to consider what the actual building and the age of the building – and this comes back to the sort of special permit and the goals of the municipality, but how does that particular city view these buildings? Do they want you to keep a sort of historical look to them? Does the facade have to remain exactly the same? Do they want particular windows to remain?
So, one thing we’ve kind of run into – and this could be kind of a point to make on your question here – is a lot of these buildings are right up against each other; they attach buildings to another one. Maybe it’s part of the same property. Maybe it’s a completely separate building, and that’s the property line, the wall. So, along those entire sides, you may have no opportunity for windows, for example. So, if you’re looking, do they have to consider, “Okay, I can’t really have a unit here. I can’t have a residential living space all along this section”.
So, you have to kind of bring in an architect, bring in your contractor – and this is something we’ve done recently – and sort of layout where units could even go, and then you can kind of dive down deeper and figure out, “Okay, based on this building, based on how it’s constructed, based on the things that I can’t change, for example, the neighboring buildings, where can I put units in here?”
So those are just little things where you might think, “Okay, look, I’ve got a 10,000 square foot floor. I’ve got five of them. Okay, I can have 50,000 square feet of living space”. Maybe that’s not the case. Maybe you have to consider doing something else, amenity space that wouldn’t require windows or natural light along the edges. Maybe you put your hallways, your elevator there. So, that’s something to consider – a lot of old buildings have elevators. Still, they’re very old and maybe need to be serviced. So, that’s something to consider, because a lot of the residences we’re seeing like to have elevator access, of course… And just some other things you might deal with, with older buildings. We’ve kind of walked out on — a lot of the older ones we’re looking at that had very high ceilings, so you have a lot of room to work… Yeah, more attractive to potential renters, where the ceiling is not right on top of you… But just different eras of construction had different facets to the era that could affect how the buildings laid out. But just simple things like that. How close is it to neighboring buildings, what are you looking at in terms of ceiling heights? How old is the elevator? Things you will keep and that you can’t really change, you want to be cognizant about when you’re projecting what you can do there.
Joe Fairless: Let’s say the city was on board for giving you a special permit or a zoning variance, but the building itself was a pass. Has that happened before?
Nick Earls: Yeah, I’d say the majority will be, and the two avenues that you could arrive that you have to pass is a) price, the obvious one. A lot of sellers just want just a little bit too much and the numbers can’t work. And the second one would be just if there’s major issues structurally with the building, as Eric said; maybe the building is very large, but it’s attached to another building, and there’s no way to punch out windows, so a lot of that space is just lost, you can’t convert it to residences. Those are kind of the two main things that would slow you down. So I’d say most deals you’d be turning down, but at the same time, it’s easier to make a deal work when you’re doing the extra steps to add value and create a vision that other people might not have had.
Joe Fairless: Let’s switch gears a little bit. Luxury condominiums… How do you define a luxury condominium with how you build it?
Eric DiNicola: Well, I’d say it’s sort of a loose definition, but a lot of the demand in Boston is for condos of the type that we build, and a lot of our peers are competitors or whatever you want to refer to them as, build as well. So these would include things like very high-end appliances. JennAir, higher-end large quartz, or marble stone islands, very large, typically, two-plus bedrooms… Of course, you can have a one-bedroom, but a lot of the ones we deal with and the most we see in our market would be two bedrooms or so, around 1,000-plus square feet. Again, you might see 2,000 square foot luxury condos, but just really the market we’re working in. You’ll see master bath with unique tiling in and around the shower, compared to maybe the guest bath… You might see outdoor balcony space, roof decks with views of part of Boston skyline… But just very high-end finishes. Amenities… If it’s a condo building, you’re dealing with Condo Association. You want things where access is clear outside. People have their own access, you might have your own parking garage or space within a garage. Elevator access… We’ve seen that doesn’t affect as much. You get a higher price per square foot if you have an elevator, but we’ve done a lot of buildings where we didn’t have an elevator there, four-storeys or less, and the demand was still there. But it’s generally those first things I mentioned, that sort of size and finish level.
Joe Fairless: That’s helpful for a reference point. So, that’s the type of product that you’re creating.
Joe Fairless: Now, let’s talk about the numbers behind that product. So, can you walk us through some numbers from start to finish for what a project like that costs and how much you make on that?
Nick Earls: Sure. I’ll use rough numbers from a project we did a couple of years ago, that I think would be kind of an entry-level project that might be attainable for a lot of people. It was an existing two-family building. We purchased it for $600,000. We saw that in the area you could sell condominiums for around, at the time, 500-600 bucks a square foot, and we could build that product for around 200-225 bucks a square foot. So there’s a significant difference there; at 600,000, pretty low acquisition price. I know it sounds high, maybe for a lot of people, but for that market, for two family in that area… We had a period where we’re holding the building and paying interest and we’re paying our architect and we’re paying our zoning attorney while we’re going through the entitlement process, which took about 6-8 months. So we picked up some soft costs there, a couple hundred thousand in soft costs. Our construction budget was around $2.4 million for this one, building seven units that we were approved for in the end, and we made around roughly a million on it.
Joe Fairless: In profit, you made a million?
Nick Earls: Yep.
Joe Fairless: What period of time, from start to finish?
Nick Earls: Overall, to get them all sold, between a year and a half to two years.
Joe Fairless: Got it. Well, that would be a success. $500,000 a year is a nice chunk of change. Knowing what you know now, what’s something you would do differently to make more than a million dollars on that project?
Eric DiNicola: Well, I think one thing we would do – and it’s not necessarily exactly for that project, but it sort of relates, is we would have brought in outside investors earlier. So at that time, that was our major focus, that project, and we could have maybe had two projects going on at once. Now we have several going on… But we kind of dedicated all our time and effort to that; it was a long neighborhood process. Nick said about 6-8 months, which now we’d consider short; times have sort of changed a bit… But that entitlement process was about 6-8 months.
So, if we had done anything different, it would have been to maybe take on another two or three, four projects at the same time, and really try to space out when the income comes in… And we wouldn’t be spreading ourselves thin, because we’d have multiple general contractors and we’d just be focusing on sort of bringing in investors to get those, rather than just continually pooling our money to buy the next project, waiting for one to complete.
Joe Fairless: How do you structure a deal like that with investors?
Nick Earls: Typically, you could do a couple different ways; it depends on the nature of your relationship with the investors. You could do a syndication, mutually 506(c), if you have a presence online or anything. Or if it’s someone you have like a pre-existing relationship with is involved in the investment, you could do a joint venture structure. So, we’ve done a couple different structures, depending on who the investor is. As we’ve grown, we’ve grown more investors. It’s mostly just syndications.
Joe Fairless: Okay, drilling down more specifically. A 5-6(c) if it’s the syndication grade, or 506(b) where you’re not publicly advertising it, but what’s the actual structure of that syndication?
Eric DiNicola: So we’ll be the sponsors on the deal, and we’ll go get the debt, and we’ll come back and say, “Okay, maybe the entire project is say $10 million, right?”. So, it’ll be 75% of that or so in debt, and then we’ll have the remainder in equity. So, we’ll contribute a portion of that equity, maybe 10% to 20%, depending on — say, for these numbers, for example, say it was $2.5 million in total equity; we’d contribute maybe 10% to 20% of that. So, $250,000 to $500,000 would come from us as the sponsors, and then the remaining equity would come from limited partners(LPs).
And as Nick said, we’ve done this differently, but say for this example, we’d have maybe a preferred rate of return, depending on what the specific deal entail and then waterfall style split after that. So, we might have a promote in there where we’d hit a couple hurdles. Once the investors receive a certain IRR, then we’d hit a hurdle, and get to the point where maybe we’re splitting it 50/50 by the time we get to the last hurdle. So, that’s kind of a brief overview of how we might structure something like that.
Joe Fairless: Taking a step back, a question I ask all the guests – what’s your best real estate investing advice ever?
Nick Earls: Mine would be always keep learning. I know, it’s kind of a general one, but I can get into more specifics… We were talking about the office conversions. Going into this particular project we’re in, we weren’t familiar with the nature of opportunity zone funds, or even historic tax credits. We didn’t have prior experience with that. That shouldn’t deter you from pursuing an investment. You just have to have the attitude that, “Okay. Well, other people can learn it. I can, too”.
So one thing we do is, a lot of times there will be consultants for a lot of this stuff. So any subject that we don’t know about, we try to hit the phones. We have a colleague of ours who works with us and he just kind of does a detective work on Google, or from word of mouth reference and gets a consultant on the horn, or… There’s so many different people out there that can teach you what you need to know. But definitely talk to people and always keep absorbing new information. If you don’t understand how to structure things, learn it, and then you’ll know going forward.
Joe Fairless: We’re going to do lightning round. Are you ready for the Best Ever lightning round?
Eric DiNicola: Let’s do it!
Nick Earls: Ready!
Joe Fairless: Alright. What deal have you made the most amount of money on to date?
Eric DiNicola: I would say a deal in East Boston we did; seven condominium units with parking, outdoor decks, roof deck, balcony… All homeowners who bought the units… Actually one investor bought a unit as well.
Joe Fairless: Awesome. How much did you make?
Eric DiNicola: We made probably 200% on our money on that, over a million dollars.
Joe Fairless: Cool. And over a million, like, between 1 and 2, or…?
Eric DiNicola: Yeah.
Joe Fairless: 2 million bucks?
Eric DiNicola: Close to 1.5 on that one.
Joe Fairless: Nice. That’s awesome. Congratulations on that. And on the flip side, what deal have you lost the most amount of money on?
Nick Earls: We have never lost money on a project. [Crosstalk]
Joe Fairless: I’m knocking on wood right now.
Nick Earls: We’ve had projects where we weren’t super pleased with the return, but we have never lost anything. So, we’re usually super-conservative in our underwriting; especially with development, you want to be even more conservative than ever, because there’s so many unknowns, and I think that’s kind of protected us.
Joe Fairless: What’s the best ever way you like to give back to the community?
Eric DiNicola: Well, we actually formed a nonprofit called the Lucky Puppy Society, and the purpose of the organization is to fund surgeries for dogs that maybe the owner otherwise couldn’t afford, and the dog would have to be put to sleep… And that’s kind of our major thing. We contribute a percentage of our profits for every project to the organization. It’s luckypuppysociety.org.
Joe Fairless: Coincidence or not, my dog who is trapped in this room with me during this interview just almost jumped on my lap right when you were talking about the Lucky Puppy initiative. So he fully supports what you two are doing.
How can the Best Ever listeners learn more about what you’re doing?
Nick Earls: They can visit our website, winterspringcapital.com. I also wrote an e-book about our luxury condominium strategy, winterspringcapital.com/development-book, and we’re on Instagram @WinterspringCapital.
Joe Fairless: Nick and Eric, thank you so much for being on the show, talking about your approach to development, as well as the repurposing of office buildings to apartments, and the thought process you go through whenever you’re looking at a project, and how you’re penciling it out. So thanks for being on the show. I hope you have a best ever day, and talk to you again soon.
Nick Earls: Thank you. Thanks so much.
Eric DiNicola: Thank you, Joe.
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