The secret to living is giving

Of all the Real Estate Titans I had the pleasure of interviewing, none displayed so much passion for addressing the affordable housing problems in the United States as Ronald Terwilliger. One of his current life missions, which can be summed through this quote—“In my philanthropic life, I’ve tried to demonstrate my belief that hope begins with access to a decent, affordable home. I want to help ensure a leveraged, sustained impact beyond my lifetime and inspire others to make the commitment to support affordable housing”—is truly inspiring to hundreds of thousands of people all over the world. Ronald Terwilliger continues to make colossal improvements in the lives of tens of thousands of low-income families around the world by enhancing their housing conditions.

Love What You Do

I have learned that it is important to find an occupation that you truly enjoy. Going to work on Monday morning should be something you look forward to just as much as taking family time on a weekend. My 30 years at Trammell Crow Residential were a great joy to me as I worked in a partnership culture where everyone had aligned interests. We had a work hard/play hard culture, and while the partners became great friends, it was clear that business was our first priority.

I came from a modest beginning growing up in the public school systems of Arlington, Virginia. I was only able to attend the Naval Academy because I was a recruited athlete. At the academy, we had courses that focused on a naval career and I graduated with a degree in Marine Engineering. I served during the Vietnam War and then gradually became disenchanted with a naval career, so I left after five years to attend Harvard Business School. I have always had an intuitive feel for numbers, and after taking one course at Harvard on real estate I decided on real estate development as a career. By joining the Real Estate Club in business school, I was able to meet with real estate companies wanting graduates. I landed at Hilton Head Island in South Carolina working for the Sea Pines Company in recreational community development.

After working at Sea Pines and going through a bankruptcy in 1974, I moved to Dallas, Texas, and became chief financial officer of a commercial construction company. I was restless in that role, and longed to get back to development. My big break occurred when I was offered a partnership by Trammel Crow to move to Atlanta and rebuild Trammell Crow Residential Companies in the eastern United States. Because the recession in 1974–75 decimated Trammell’s interests in the east I had to take a pay cut to join the Crow organization, but I was given an ownership of interest in my new company and a chance to build wealth through real estate development.

My second big break was discovering the rental apartment business. I started my first apartment development in an office park in the Cumberland area of Atlanta in 1980. I built that project for $30,000 per unit and sold it a year after completion for $50,000 per unit. I instantly fell in love with the apartment development business.

The Importance of Mentoring

I had two mentors early in my career and greatly appreciated them both. At Hilton Head, Charles Frasier founded the Sea Pines Company and was a visionary developer of environmentally sensitive communities. Charles had studied recreational developments on the East Coast and had an opportunity to develop a new type of community on the south end of Hilton Head Island, South Carolina. Charles was one of the early pioneers with architectural review programs to ensure that all housing as well as commercial structures were compatible with the environment. He not only built golf courses and tennis courts, but he built walking trails and golf cart paths for residents to get through the community without using automobiles. Sea Pines communities were very appealing to vacationers and retirees alike. Unfortunately, Charles had one blind spot, which was risk management. He built our communities using debt from the mortgage REITs from the early 1970s. He borrowed 100 percent of cost at a rate of 5 over prime. In 1974 when the prime rate went to 12.5 percent, he defaulted on all of those loans.

After a three-year stint in the construction industry, I rejoined the development community in Atlanta, where Trammell Crow (the man and the company) took me on as partner. Trammell, who founded the firm, had returned to Dallas after serving in the navy during World War II and began building warehouses. He understood he would need to add to the built environment to satisfy a growing population of returning GIs who were marrying and starting their own families. Trammell created a national development company using a partnership concept. He would use his reputation and financial statement to start new development companies across the United States and soon became the largest developer of commercial and residential real estate in the country. Trammell was an optimistic, charismatic visionary and was unusually generous. His partnership approach enabled many young partners to build wealth, as all partners shared the profits of development. However, similar to Charles Frasier, Trammell thought very little about the downside risk and his company was deeply hurt by the 1974–75 recession and completely floored by the 1989–93 recession.

While I learned the danger of overleveraging the hard way in both companies, I am forever grateful to Charles and Trammell for the opportunities they provided. Because of my experience in the mid-1970 downturn, I limited the leverage Trammell Crow Residential used and am convinced that allowed us to survive the 1989–93 recession. My experience is that we live in a cyclical economy and are unlikely to anticipate the next downturn. Consequently, real estate developers should operate their business on the assumption that there is a recession coming and they will need to survive for at least three years without capital to start any new projects.

Be Realistic

The real estate development business is a risky business. The demand side is certain to be compromised by an economic downturn. Some property types are more vulnerable than others. I find the apartment development business to have one of the best risk/reward relationships because a well-managed apartment will stay full during a downturn, although you will have to adjust rents downward to stay full in a weaker market. The key to responsible financing of apartment developments is to keep construction debt to 75 percent of cost or less and to have construction loan maturities that are long enough to get you through a recession.

Not every new development will be a winner, but you have to understand the downside of each investment. The biggest mistake I made in the rental apartment business was closing on land before we were able to begin construction. As the market heats up late in the cycle, land sellers demand both higher prices and more difficult terms. In the mid-2000s I compromised my risk management principals by agreeing to purchase land with a financial partner well in advance of having building plans complete enough to start construction. The Great Recession came upon us unexpectedly and the banks called the land loans at maturity. Our company guaranteed land loans and our “partners” walked away from their equity investment leaving us to deal with bank loans on apartment land that had fallen in value by more than 50 percent.

Personal guarantees (recourse debt) are something that you should agree to only if you have virtually nothing to lose. In other words, you should never agree to obtain recourse debt. We have used guarantee corporations and subsequently business asset guarantees to satisfy lenders and investors. My current development company capitalized our platform adequately to satisfy our creditors and we have managed to keep enough liquidity to use when necessary. Developers who survive business cycles in real estate have become good risk managers. You must guarantee completion in virtually all instances, but risk sharing beyond that is important. Essentially, you need to be thoughtful about what you guarantee as well as what credit you put at risk with your guarantee.

Real Estate and Recessions

I have already talked about the cyclicality of our economy and the difficulty in anticipating the beginning, duration, and depth of a recession. If you are dependent on development and construction fees during the recession, you will quickly find out that your fees run out before the recession ends – at least in the merchant building apartment development business. You should try to build into your business recurring fees, such as property or asset management fees that continue in periods of limited development activity, so that you have a chance to sustain the organization. Some of my competitors have been forward thinking enough to get into the acquisition business and the fund management business to provide them with fee income throughout the entire business cycle.

During the Great Recession, developers who were unable to make good on their guarantees had an impact on many banks and investors. It seems to me that every recession creates a change in the standard methodology of development financing. Believe it or not, before the 1989–93 recession, developers in the United States were not required to co-invest in their projects; the entire project could be financed by a lender. Peter Linneman writes, “the equitization of real estate” took place in the early 1990s and the modern REIT era began by replacing lots of debt with public equity (see Figure 3.1). Beginning in 1994, Trammell Crow Residential had to begin co-investing in new real estate developments. Looking back, it is amazing to me that we were not required to have “skin in the game” before then.

After the Great Recession, the banking industry became much more conservative. Construction loans, which are readily available for apartment developments at 80 or even 85 percent of cost, are now hard to obtain at more than 65 percent of cost. New developments are therefore much more conservatively financed and require more capital from developers since the co-invest percentage of the equity required are for construction loans for 50 to 65 percent of cost.

Since I have been in the development business longer than most, I am frequently asked, “What inning are we in?” I don’t like the baseball analogy, as I believe no one knows when the next recession will occur or what will cause it. This has been a long expansion, and we have enjoyed lower interest rates and positive leverage on development yields beyond what I have ever experienced. Rental housing has become necessary for more American families as single-family construction has lagged and construction cost increases have caused fewer families to be able to get a mortgage if they should desire to purchase a home. Demographics in the United States indicate that almost 9 out of 10 new households will be minorities. That fact suggests that rental housing will play an even more important part for housing America’s families than it has since the Great Depression.

Keep Learning

Having been in the real estate business for almost 50 years, I realize you must keep learning and adapting. While housing is a fundamental human need, the kind of housing families desire and can afford vary over time. Lifelong learning is a prerequisite to survival in the business.

While real estate is inherently a local business, it is important to stay abreast of national and regional as well as local trends. Many new ideas seem to emanate from California, and right now the risk of rent control is a risk many people are watching carefully.

I am a big fan of the Urban Land Institute and its local District Councils. Participation in an industry association can be educational and broadening. I encourage everyone to keep abreast of new developments and trends.

It is amazing to me that the development side of our industry has been impacted so little by the technological revolution that is taken place. We essentially build buildings the same way we did 30 years ago, and some argue the labor is even less productive because of increased regulation. Incomes are failing to keep pace with project cost increases, and our industry is likely to be forced into product innovation including smaller homes with more density. It’s clear to me that American families increasingly want the option to leave their cars at home once they get back from a day’s work. Accordingly, “walk scores” are an increasingly important benchmark to help evaluate the desirability of new locations.

The twenty-first century is likely to result in a lot of changes in technology and alter the nature of jobs and living patterns. We have a housing affordability crisis in this country that will need to be dealt with by government at all levels.

The Two Markets

The United States has two types of real estate markets. The first is supply-constrained markets, and the second is commodity markets.

Examples of supply-constrained markets are those in California and New York. There is the potential to make a great deal of money in these markets since infrastructure is already built. The entry price is very expensive and barriers to entry are high, however, keeping the supply of new housing low.

I am often asked if there is a “first mover advantage” in multifamily real estate. Multifamily rental is typically a commodity business, so this advantage rarely exists. There always has been, and there always will be, plenty of places for families to choose where to live. In addition, there will always be a demand for multifamily real estate.

The key to success in real estate is to have a product that meets the market demands, including the right finishes, the right location, the right mix of units, and the right manager. A truly great property will stay leased through a downturn.

I built my first apartment complex without a mentor to guide me and show me how to succeed in that business. The skills necessary for success in the world of real estate are not the ones most people expect to find when picking up a book like this. You need raw intelligence, vision, culture, and a passion for hard work.

Some of the best developers I have ever seen are the best copiers. They study successful businesses and projects and just replicate them. They don’t think they need to create the perfect apartment complex. Instead, they look at what’s working.

This is the ideal strategy for new and old investors alike. There is no need to reinvent the wheel or develop a brand-new type of apartment building. A big element of success comes from focusing on what is already working. Building cost-effectively is the key for those in the business of development.

That’s the beauty of the Crow organization. The way you can align incentives correctly with charismatic and generous founders, as well as provide a great deal of mentorship within an organization, is magical.

My Philosophy

A few personal philosophies and beliefs have helped me have a successful career. I believe that you should enjoy every single day. Take care of your health and cherish your family. No matter how much money you make, at the end of the day your family is your foundation.

I came from a family of modest means, and I never knew anyone growing up who had money. I grew up in Arlington, Virginia, in a 900-square-foot house. My dad always worked two jobs, and there was not a single year in his life that he earned more than $10,000. His day job was selling wholesale petroleum products. After working his day job, he would come home, take a nap, and then go off to his night job. For a while, he was the late-night manager at a movie theater. Then he became a deputy sheriff.

I inherited my dad’s work ethic. I worked all summer, every summer, starting at age 12. I had a different job every year. Delivering newspapers on my bicycle. Inventorying furniture for a moving company. Sweeping the floor at a car dealership, then polishing the used cars. Laying down sod for a landscape company. The extent of the training I received for that position was three words: “green side up.”

In my 50s, I began accumulating wealth. I decided to become philanthropic and work with nonprofits as well as becoming a donor for causes I care about. When I die, my family will be taken care of, but the bulk of my estate will be dedicated to developing affordable, decent housing for low-income and disadvantaged people.

Most of my efforts now and my passion for giving are directed toward the affordable housing crisis in the United States (and around the world). I also work hard to help low-income children get an education. I am a beneficiary of the American Dream, and I believe it is important that every American family have an opportunity to improve their lives and avoid multigenerational poverty.