Shownotes
Ben Maxwell founder of HCM Capital Group, is a third generation entrepreneur and has been going at it ever since entering the workforce in 1999. He started HCM Capital in 2002 as an infill real estate development firm that focuses on the Denver Metro area. HCM Capital has experience in both residential and commercial development. Ben talks about his journey and shares that he wants to be proud to drive through the communities in ten to twenty years from now and point to the long-standing projects they helped create and are still involved in.
Infill Development, Private Capital, Providing Value, And Avoiding Denver Fugly with Ben Maxwell
On the show now, we’re fortunate to have as our guest, Ben Maxwell. He’s the founder of HM Capital Group. He’s a third generation entrepreneur and has been going at it ever since entering the workforce in 1999. He started HM Capital in 2002 as an infill real estate development firm that focuses on the Denver Metro area. HM capital has experience in both residential and commercial development, lending, construction management, design and brokerage. At HM Capital, Ben wants to be proud to drive through the communities in ten to twenty years from now and point to the long-standing projects they helped create and are still involved in. Ben, it’s a pleasure to have you on the show.
Thank you very much for having me.
How on earth did you ever get started in this business?
I was fortunate enough when I was a kid to learn a little bit from my grandfather and my dad. My grandfather was a big commercial general contractor in Kansas City. He built small bank buildings and hospital buildings and things of that nature. Then my dad took that business over when I was young and got into the commercial development business through the mid ‘80s and then still been involved in real estate since then. I learned a lot of the business side of it from him. In high school, in the winters and summers, I had a lawn mowing business. I had always worked for myself and love working for myself. In the winters, I worked from my next-door neighbor who was a custom home builder, a spec builder in Kansas City. I learned the carpentry trade from him. I went to college for about a year and a half. I successfully dropped out of a few colleges and then moved to Denver and fell in love with it. I started a construction company right away. We had a subcontracting business where I had framers and drywallers and trim carpenters and things of that nature, we were subcontracting. A couple of years after that, I bought my first fix and flip over in the Old Baker neighborhood. That was 2002. We bought our first ever flip and did most of the work ourselves, swinging hammers in there, and got lucky and made quite a bit of money. I was hooked and addicted to real estate ever since.
There wasn’t much of a fix and flip market in that timeframe, was there?
There weren’t as many people as doing it right now. We call it the HGTV effect in our business. There are a lot of people that are in the business now that weren’t back then, but there was still quite a few professionals doing it. It just wasn’t nearly as popular back then for sure. We made some good money on that one, and I went from doing one to doing two and grew the business from there.
One of my part time jobs back when I was a kid was construction site cleanup. I did that in the winter and, like you, I mowed yards in the summer as well. Being an entrepreneur, what do you think the lessons were that were passed down between your dad and your granddad that basically started this entrepreneurial bug in you?
I learned a lot of good, valuable lessons. My grandfather was an extremely hard worker, always willing to be the first guy out there, the hardest one out there, and making sure that the job got done. My dad taught me a lot of good lessons on being very detail-oriented on financials, what numbers really looked like, not lying to myself about what I’m projecting, what I think things are going to be cost or be worth, but really know the facts. I’ve learned a lot from both of them in that regard. Then I learned a lot about hard work and good quality instruction from my neighbor Kevin. I learned a lot of different valuable lessons from a lot of different people. My viewpoint has always been that I’m not the smartest guy in the room and I want to learn from those that have more experience and learn hard lessons the easy way instead of starting the hard way. Learn from those who’ve already been through it as much as possible. Not that I haven’t had my own hard lessons. I called them my Master’s Degrees that I’ve paid for.
HM Capital Group: Learn from those who’ve already been through it as much as possible.
What does HM Capital do? In a thumbnail sketch, what is it that you do and who do you serve?
Our business has definitely evolved over the years. We started out in 2002, we were doing all fix and flip properties. We started out doing a few, then we’re doing ten or twenty a year, and then we’re doing 30 or 40 a year. We moved to doing some new construction stuff in 2006 and 2007. I’m doing some new and all this at the time, we kept some properties as long-term cashflow rentals, but the majority of the stuff we did was for sale. Then in 2008 and 2009, when the financial crisis hit, I raised my first private equity fund and it came out with a private placement the week Madoff was arrested. It was a good time to raise private capital.
Am I sensing a reoccurring theme here?
It was great timing, but we were successful. We raised $4 million of equity and we raised $4 million of debt financing. So 2009, 2010, 2011, we did a large amount of fix and flips again. We moved back from new construction back to doing fix and flips. Then in 2012, 2013, we wound that fund down. We raised separate smaller private equity funds now for different projects and focused mostly on new construction. We build anywhere between 20 and 80 new residential units a year. Over the past six months, we’ve converted a majority of our projects from building cell developments to build and hold, so more a long-term cash flow, long-term rental projects. We’ve also expanded more into multi-unit as well as mixed used projects. We have a couple of two big mixed used projects where we’re redeveloping entire city blocks, one over in Park Hill that’s got retail, restaurant, office, a few apartments and townhomes all for rent, then another big project over in the Sunnyside neighborhood. We’re remodeling an existing 45,000-square-foot office building for office and retail and then building 33 rental townhome units there as well. We started out as small fix and flip selling $300,000 and $400,000 houses. Now we do everything from building one-single family home in the $900,000 price point to building multifamily, sixteen-unit buildings that we’re renting for long-term cash flow as well as these large $25 million plus redevelopment projects. We have the whole board covered.
We talked in the very beginning and you do infill development. Some folks may not be familiar with that term.
Infill development basically means taking a piece of ground that’s inside of city limits of Denver and repurposing it for something that’s maybe higher and better use. In a lot of cases, it’s older buildings. Typically, we don’t turn down anything that’s got historical value. That’s not our MO. A lot of people do that. We typically like to save that stuff, but buying stuff that’s been beat down or structurally unstable or just flat out not viable in the market and tearing it down and re-purposing it because of the zoning allows for more density or a higher value project. The land is worth more than what the existing structures that are on the land are worth. Basically, it’s just development that happens within the city on an existing parcel that’s already had a prior use or prior life.
At this segment, I thought we would try to take in and drill down a little bit for the folks out there going like, “If I wanted to reach out to you, how would I know if I’m a potential customer if I own a piece of property?” How would they know that they would be a potential client or customer of yours?
The people that we work with the most are two-fold, people that either wanted to sell their land outright or somebody who wants to put up property or maybe joint venture with us on a project where they owned some land and they think that it’s underutilized. Typically, the people that are selling to us have either a home or an old commercial building that’s on quite a bit of land, or even a small city lot, but the house is underutilized. The house is not livable or barely livable; something that needs to be torn down and there’s no historical significance to it. There’s no part of the property that can’t be developed. It’s anybody who has a property that they think that can be utilized in a much higher or better use than what it is currently.
You obviously have the ability to multi-task and manage projects and so on. In our chat, you have a particular culture that you’re trying to promote within your firm. With all the various projects and all the quantity of people you have, how do you take and maintain the culture in your firm?
The biggest thing for me is having fun and enjoying our time here every day. I definitely promote that work should be work, but it also should be a good time. Everybody should enjoy what they do. I want to make sure that everybody here, as well as all the contractors and third party vendors that we use, are all paid well, enjoying themselves and have a good quality of life. We try not to take ourselves too seriously. It’s easy to get wrapped up in the fact that we’ve got a lot of projects. We manage probably about $50 or $60 million or so in capital. It’s easy to get wrapped up in the stress in the day-to-day, but trying to focus on the overall big picture and picking projects that we as a group enjoy. We don’t want to build just everyday average properties. We want to build stuff that’s fun, that’s cool, and that’s different. The inside finishes are something that we can be proud of. We never want to find ourselves on Denver Fugly, which is a website that tracks ugly development going around Denver. We have only been there once and it was for a project that was highlighted as this is good architecture, not bad architecture. That’s what we want to be proud of. We want to make sure that our stuff stands out and we provide good value not only to the people we’ve sold houses to in the past, the people we’d rent homes to, our commercial tenants.
For my partners and I, especially myself and everyone who works here, bottom line is definitely important, but it’s not everything. We want to make sure that we feel that if everybody is paid well, if everybody is having fun and our product turns out better, our homes turn out better. If we’re diligent about what we pay for land, if we’re diligent about our costs in between, we can afford to sell homes that are better than the average. We can rent homes that are better than average for average price or less. Our goal is to make sure that we’re always providing value to anybody that’s coming behind us, whether that’s a tenant or somebody who we’re selling to. We’re giving them the best product on the market at average or fair price instead of an over-expensive price.
Bottom line is definitely important, but it's not everything.
As you’re talking about the quantity of contractors and the people that you are working and so on, how do you attract and retain key people?
Fun is the biggest part of it. When people want to take vacations, we let them take vacations. We pay everybody probably a little bit more than most. The biggest thing is making sure everybody at least is enjoying their job, or at least one part of their job, at least once or twice a week. We do stuff together as a group quite a bit. We just took a big contingency. We rented a house on the beach in Florida and took a big contingency of contractors and project managers, some of my staff here, and their families and kids and went down there for a week. Earlier in the year, we took a big group of my architect and a couple of the guys here from the office and did a trip in Spain and went and visited a Barcelona and goofed off, and then went and saw one of our factories that we buy a ton of our materials, cabinets, tiles, and plumbing fixtures from. Really, it’s making sure people see and recognize that they’re valued, that we enjoy having them on the team, that they feel like they have a say and they can create their own destiny in some respects as well.
As you take folks to various places and so on, do you try to structure that much or is it mostly free flowing once you get there?
Mostly free flowing. Lots of people in a structured environment, we do have some stuff that we try and do, some dinners out and things of that nature, especially the ones with the kids. It was fun. The kids all got to hang out and get to know each other and play at the pool and the beach for a week. It was amazing to see everybody get to know each other on more of a personal level rather than just employee-employer, contractor-subcontractor basis.
You talk about the evolution of your business. What was the key thing that you did that allowed you to grow your top line revenue?
The biggest success I have in top line revenue was learning how to manage and raise private capital. A lot of people in our business try and do it with their own money, try and do it with their own capital to start, which is great. I started with about $10,000 of cash and some good luck. The business grew when I learned how to take our business from not just a construction company and a real estate business, but a capital management business. The old company name when we first started was Lighthouse Investment Group and that’s why we changed it to HM Capital in 2012 because I realized that raising capital allowed us to have the volume and the appropriate capital structure to make quality and good decisions. In our business, there’s a lot of different strategies and a lot of them that I took early in my career, a lot of good lessons learned like I talked about from 2007, 2008 time period. We were fortunate enough in 2008 and 2009 to pivot fast enough that we made enough money to cover our mistakes that we made in 2007 and 2008. A lot of people weren’t. The biggest thing I learned was having flexible patient capital where I knew I had the bandwidth to make quality decisions. I see a lot of people make decisions based on cash flow and the bank.
In our business, there’s a term called hard money loans where you’re borrowing, 80%, 90%, even sometimes 100% of the cost to do a development project and you’re borrowing at high interest rates. I did that quite a bit early in my career. I learned very quickly that the decisions you can make when you have that kind of capital structure are very limited. You have to do this project. You have to get from A to B quickly. You have to sell it. You have to do things that in a perfect world you probably wouldn’t do. Now we use very low leverage, if any leverage at all in our projects. We’ve got about $60 million in equity cash that we manage. Against that, we have maybe $8 million or $9 million in debt from bank loans. We don’t use high leverage. We don’t use financing that causes what I call just mistakes, speculation. We like to do it based on an investment. We have very realistic expectations on what that capital will do. We’re not trying to hit home runs every single day. We’re just trying to constantly hit bases every single day.
For the entrepreneur out there, I find myself leveraged and finance to myself, and this is the notion of doing financing like you described. How did you learn? What were the steps? You go, “That was an evolution.” How did that arrive at your doorstep?
It was definitely an evolution. It came to me in a way a lot of things do. It just happened. One of my partners in 2005, 2006 used to work in a large investment bank. Him and I looked at doing private placements financing basically as a way to raise capital from just accredited investors under a certain dollar amount. We looked at doing that in 2007 and started the whole paperwork and went through the whole process of writing a private placement for some higher-end development projects that we’re working on at the time. I learned the whole process from him. I had some good attorneys that I learned a ton from. About three-quarters of the way through that process, we saw what the market was doing and we ended up bailing on that project because we realized that the high-end market was deteriorating pretty quickly and knew we didn’t want to raise the money. We knew we couldn’t make the projections that we thought we could, so we bailed on that project initially. The concept of it had just stuck with me. Then the financial crisis hit and we sold stuff that we had in the hopper. Luckily I didn’t try and sell majority of the stuff that we were finishing. I just rented it and it covered our mortgages, it covered our cashflow. We had some negative cash flow but we were able to cover it back to leverage management. It went high unfortunately, at the time. That was a lot of the mistakes we had. We had high leverage at the time.
You either learn from it or it kills you.
That was my master’s degree in real estate finance. Mid-2008, we had started doing a ton. We moved back to doing a lot of fix and flip properties at the time. There were a lot of foreclosures. You could find foreclosures on every corner. We were buying probably 40 or 50 units a year and we had different capital structures all over the place. We had a partnership with this guy doing four deals and a partnership with this guy doing six deals, and this one had high leverage and this one was all cash and this one was we were just doing the construction for somebody else who was doing it. I realized that that was just not a sustainable model. We had too many pieces moving in too many different directions. We were doing a lot of the work, we were finding a lot of the projects, but we weren’t getting compensated for it because we didn’t have the capital structure in place to do it correctly. That’s when I decided, “I’m going to try and do this private placement thing again.” I hired some good attorneys in town and wrote the first successful private placement that we did.
HM Capital Group: We were finding a lot of the projects but we weren’t getting compensated for it because we didn’t have the capital...
