In 2006, a friend in New York hired me to go to Berlin, Germany to help him start a real estate investment company. My friend was buying apartment buildings in foreclosure, with cash, and wanted me to help him develop a business plan and set up a lending facility with a local bank. At the time, I could speak Chinese and analyze the stock of listed companies from Taipei to New York, but I did not speak German, had no experience in Europe, and had never worked in real estate.
Meeting the Team
Upon arrival in Berlin, I met the CEO of Berlin Real
, my friend’s real estate investment company, and he took me to a flat in Friedrichshain, which would be my home for the next several months. Feeling lost in a sea of German speakers, I used Meetup to find a pub in Kreuzberg where I could meet English speakers, and met a German speaking American woman who I hired as my translator. My new friend recommended the Goethe Institute in Mitte, where I enrolled in German classes, and we then proceeded to meet with real estate brokers, lawyers, accountants, and bankers.
Deutsche Bank, where the friend who hired me had a secured line of credit, set me up with a real estate lending officer and we visited the properties together for preliminary due diligence. The properties were late 19th and early 20th Century multi-unit apartment buildings in the eastern boroughs of Berlin. Having been in foreclosure, the buildings had significant maintenance backlogs and the bank lending officer told me that we could not get financing without renovations.
Hiring an Architect
Renovations added to my list of new skills to learn as I had never overseen even one multimillion dollar real estate project, not to mention several. Fortunately the bank and the rest of our team, which now included a Manhattan real estate investor who had overseen several renovation projects, were able to guide me. My local contacts recommended some architects and the New York real estate investor gave me an Excel spreadsheet with a model for a renovation he did in New York.
We decided to interview two architects - a large firm called KBA Architects that was handling work for Blackstone, Cerberus, and Lone Star, which were buying distressed debt portfolios in Germany, and a smaller firm called BHB + Partner Architekten & Ingenieure, owned by Christoph Bräutigam. Following site visits and interviews, we chose Christoph for his experience and because we thought he was smart and we trusted him. Christoph’s offices were also convenient on Friedrichstraße, where we began meeting to develop our renovation plans, which I then used as inputs for my financial models.
German Architects and the HOAI
Unlike architects in the US, German architects take on every aspect of a project from start to finish, and their work is regulated by an industry group publication called HOAI (Honorarordnung für Architekten und Ingenieure), which dictates project phases and fees. We could hire Christoph to act as architect and general contractor for the project, meaning that he would not only provide plans, but also take bids from subcontractors, review those bids with us, and then oversee the contractors selected to do the work. My hope, which turned out to be true, was that the German system and Christoph would help us to avoid the kinds of project cost overruns that I heard so much about at home, especially for first time developers.
Developing a Business Plan for Real Estate
In order to develop models for the properties, we had to decide how much we would spend on renovations, what we expected for rents after the renovations, and how much we could borrow at what interest rates. We also had to consider environmental incentives, which were administered through KfW (Kreditanstalt für Wiederaufbau), a government-owned development bank. I modeled various scenarios for each building in Excel spreadsheets to discover the best solutions for our investors, lenders, and the investment management company.
While developing the properties as condos presented the highest potential return, we decided the risk was too high.
Shopping for Real Estate Loans
Deutsche Bank hired an engineer to do a valuation of the properties and, while he was competent at assessing the structural integrity of the buildings, we disagreed on the crucial issue of what rents would be after the renovation. While I relied on current rent data from Immobelien Scout, Germany’s leading real estate portal, the engineer relied on a rental index that used historical data. The rental range he used for estimating post-renovation rents was in some cases 30-60% lower than what I was seeing in the local neighborhood.
Disappointed by Deutsche Bank’s dour assessment, I arranged meetings with three other banks, including Deutsche Kreditbank (DKB), EuroHypo, now Hypothekenbank Frankfurt, and Berliner Volksbank. Our properties were not a good fit for EuroHypo, but DKB made a loan offer 40% higher than Deutsche, and Berliner Volksbank offered nearly 70% more money, thus winning our business. The next year, when the the renovations were complete, rents in our largest building on Petersburger Straße were even higher than I estimated, as renters were willing to pay a premium for energy efficient apartments.
What I Learned
Most of what I did in Berlin was apply common business sense - mastering detail, networking, hiring people I could trust, getting advice from people who knew more than me, and shopping to get the best deal so we could offer great value to our customers. The less obvious thing was studying German, which is not a requirement to get around in Berlin. But after a few months of study, I was able to follow along in meetings, and even join the conversation when a crucial point was missed or translations were incorrect.
Knowing the local language helped me to avoid mistakes, while also establishing credibility and earning the respect of our local team.