Think Before You Build: Tyson Dirksen on Real Estate Development, Downside Risk, and Long-Term Projects

Tyson Dirksen (00:00)
We’re a lot more conservative on our assumptions. We’re willing to take a hit on the IRR a little bit for that just because we want to produce great projects that perform to our downside projections. Now, if the market goes up and we build to how we think we’re going to build, then we hit it out of the park and our IRRs are great.

Micah Johnson (00:20)
Right.

Hello everyone, welcome to the Real Estate Pros Podcast. I’m your host, Micah Johnson. And today I’m speaking with Tyson Dirksen, who’s been making some serious moves in real estate investing now for 30 years. Tyson, welcome in, man. Glad to have you.

Tyson Dirksen (02:06)
Thanks Micah, thanks for having me. Humble to be on the show. Excited to chat to you about what we’re working on and should be good.

Micah Johnson (02:11)
Absolutely, man.

I’m excited man, same, pumped to dig in. One of the projects you were mentioning, you’re getting to do some fun stuff at this stage in your career. You were saying it earlier, projects are getting bigger and bigger. But what I’m pumped for folks to see is how you go about viewing it. What’s really important, what you’ve noticed now is most important in how long you’ve been doing this. So let’s dig in on it, man. For those who aren’t familiar with you yet, tell us a more about yourself and what your main focus is right now.

Tyson Dirksen (02:42)
Sure, ⁓ you know, I started when I was 15 working on projects with my parents. So really started on the execution side. I mean, I was doing everything from painting apartments, managing apartments, sitting in leasing and acquisition discussions. So that was a great exposure and get to learn from them and grow on their shoulders. Went out my own quite early doing value add, investing in brokerage.

and had some fun, good investments there, and then moved on, went to MIT, got a really good look at how institutions value projects, and then moved into building science, screen building, high-performance building, and then after the downturn invested in mixed-use developments in San Francisco. And now we’re working on larger projects, as you mentioned.

Micah Johnson (03:39)
Man, you’ve been eating and breathing this stuff for a long time. I’d imagine you probably forgot more than I’ve learned yet. So it’s, just from the big view, from your experience, what are the big things you’ve noticed throughout your career? What’s changed?

Tyson Dirksen (03:55)
Yeah, as the projects get bigger, cycles get longer and you’re not as afraid of, you have to be more conservative about not the markets but just all the decisions you make earlier in the process. So it’s, because really the construction isn’t the difficult part, not saying it’s not difficult, but that’s where

The problems reveal themselves, but really it’s those early decisions that drive those failures.

Micah Johnson (04:27)
And if you don’t mind dive a little deeper there. So what are you paying attention to now earlier and earlier where you’ve learned that, you know, building isn’t what you, like you said, like that, it reveals the mistakes you’ve made so far. What are you paying attention to?

Tyson Dirksen (04:39)
Yeah, so usually

we focus on five structural areas. ⁓ Entitlement positioning is number one. Does the regulatory environment actually support the project’s assumptions? Often ⁓ you’ll assume parking requirements or heights or density as we build in complex ⁓ urban infill projects, a lot of them.

⁓ Two, ⁓ financial model feasibility drift. So early models often become outdated as design, regulation, costs evolve, and the models often don’t evolve with those projects properly. ⁓

Design versus execution misalignment. So architects are great. They have these beautiful drawings. The intent is great, but construction reality can really not align with those.

designs and so you really want to bring contractors, subcontractors involved in the discussions early. Building enclosure strategy, ⁓ we really specialize in building science and we find that the risk of environmental risks, regulatory risks and know ESG requirements as well as just long-term durability of projects is comes back to building enclosure strategy so facade and envelope decisions.

those need to be made early with architects. Those details need to be perfect. And then last but not least, since we’re doing urban infill projects, ⁓ execution sequencing, so logistics, crane use, subcontractor coordination, construction sequencing, that affect costs and ⁓ schedules. So really those early decisions impact and are revealed during construction.

Micah Johnson (07:22)
And what’s a typical, like what’s typical timeframe? You said earlier, like you’re dealing in longer term. So from beginning to end, how, how long you looking?

Tyson Dirksen (07:30)
Well, our smaller

projects when we were really doing development after the downturn of 08, which was a great learning experience. I’d just gotten out of MIT. So for me, there was a lot of blood on the streets. And I loved it because I wasn’t in the market. And I could learn about what broke deals through either friends who were working for big companies or just being in ULI or other real estate groups at that time.

just seeing what broke projects.

Micah Johnson (08:02)
What it was coming off of was it’s the little things. Like what I hear you saying is like there’s the little things that you do well at the beginning of a project. And that’s really where y’all just stretch yourself out in front of folks is you hear a lot of times investing, you make all your money on the buy.

Like that’s like an elementary version of the PhD statements that y’all are doing. But in essence, it says same kind of thing, just really dialed down into specifically what you’re working on. and it was the length of projects, how long things are actually taking. Cause you’re talking about your models, you know, that model drift, man, like if you’re not thinking about that, yeah, if this has taken more than a year, you better be revisiting that model. A lot happens.

Tyson Dirksen (08:34)
yeah.

Yeah, so earlier in my career it was, you know, obviously you’re doing fix and flips. Those are like year projects are even shorter. Then we got into really urban infill comp, you know, more complex, smaller boutique projects in San Francisco. Those are three to five years. Now we’re looking at, you know, six to 13 year projects. So.

That’s where the early decisions really and assumptions really make a difference. And you have to have go, no-go phasing, sequencing of your decisions and clear governance because you’re dealing with institutions or high net worth individuals. ⁓ Transparency.

transparent reporting and governance. if things, or when things go wrong, because inevitably things are gonna go somewhat wrong or the assumption is gonna be somewhat off. And so it’s really dealing with those. I think that our assumption, my way of going about development has changed in the sense that I really focus on downside risks ⁓ and downside protection rather than.

Micah Johnson (09:32)
Right.

Tyson Dirksen (09:51)
have the rose colored glasses on and just be like, yeah, this is all going to work out. It’s like, all right, what happens if the market changes? What happens is our capital line. Do we have enough? Is it long cycle capital? it long duration capital due? Is our capital stack properly enough equity or the debt able to be extended? ⁓ so

Micah Johnson (09:56)
Right.

Mm.

Tyson Dirksen (10:50)
We’re a lot more conservative on our assumptions. We’re willing to take a hit on the IRR a little bit for that just because we want to produce great projects that perform to our downside projections. Now, if the market goes up and we build to how we think we’re going to build, then we hit it out of the park and our IRRs are great.

Micah Johnson (11:11)
Right.

And that’s how you hit home runs in the industry. Like hope’s not a strategy in real estate at all. And the more folks I’ve met throughout my career that have been in this a long time, they do what you’re talking about. It’s mitigating the downside. Like upside, it should have upside or well, there’s some, obviously there’s connections, but the upside isn’t what’s driving you. Like, yeah, it does have to have it. But if a bunch of things need to go right,

for that to happen, now you’re just running into exponential potential for it going wrong. And it’s those on the bottom, man. that’s, I like hearing continuity and advice from people that have been in the industry for a long time is yeah, you hit home runs by doing these little things well, which is kind of continuous with what you’re doing now, but now you’re doing it, man, projects that take six to 13 years. I just gotta ask, how much do you say no to?

Right. I bet you’re saying no way more often than anything else you’re doing.

Tyson Dirksen (12:08)
A lot. Yeah, we’re saying no

to a lot of projects. So when I say we have two that are in early stage feasibility, it’d be great if we do one of them. But we don’t find passing on deals to be a failure. It’s just ⁓ really good discipline. And you were talking earlier about the fact that

You know, these are longer projects and you, you know, to hit a home run, you’ve got to think all these risks. And that’s where it comes back to systems thinking, you know, you, one little thing can be wrong. And if you thinking about the system, it will override that problem. But when a bunch go wrong, that’s where your downside risks yet you’re, you know, you’re really planning for those to go wrong and you still keep your shirt on and.

and you know don’t lose the farm those are important because those can happen. Look at 2008 and again that was a great learning experience for me.

Micah Johnson (13:02)
Right.

Right.

Right, right. like it’s, it’s, it’s the part where it is investing very much there, but there’s that risk that’s always there. But all the studying, all the things that we do are keep what keep it from being gambling. Like it’s, it’s, it’s, that’s the difference. Can stuff go wrong? Absolutely. But the best learn and keep going. That’s what I like about real estate. It’s constantly learning. It costs, and you get to grow with it. It’s huge. You actually said this a little bit beforehand about the two projects.

Your focus now is actually working on things you projects you like is that’s that’s part of the point where you want to be excited about it too. Because if you’re going to be, you better be, if it’s going to take six to 13 years to come to life, right? You don’t want to be just flip-flopping in the middle of

Tyson Dirksen (13:56)
Yeah, I mean, you mentioned ⁓ about the fact that am I stretched too thin at the moment? And, you know, I reply, I’m, you know, I always reply, I’m not stretched too thin because I love what I do and I pick projects I’m passionate about. So I’m very lucky in that sense. work, you know, I have my, founded both companies, Dorada advisory, which we do advising role, you know, work on and then evolve development group, which we actually execute certain development deals on.

And so I get to pick our projects. So while I work a lot, I love it. And also I’ve learned as I’ve aged not to stretch myself too thin just for life by life work balance, as well as you just don’t have the same product if you stretch yourself thin.

Micah Johnson (14:42)
Right. Right, man. That it’s funny. My, ⁓ one of the coaches I got to work with, he’s worked with some really big athletes, but he talks about like a champion’s greatest word in their vocabulary is restraint. It’s, it’s, it’s not going all out all the time. That’s not what the best have ever done. It’s about being very intentional with your actions, whether that’s even doing nothing, right? Doing nothing is still doing something. He calls it receivership, like just letting your body sit there and catch up. It’s very important to do.

Tyson Dirksen (14:53)
Yeah.

Micah Johnson (15:12)
along with finding that balance of your thing. That’s something I love about real estate is it pays the emotional paycheck really well. And if you line it up right, pays the financial paycheck, excuse me. But if you line it up right, it pays that emotional one too, where you get to enjoy what you’re doing. You get to participate in it, whether you, development like you’re talking about, all the way down to single family, like whatever you want to do, it has that itch that you can scratch that lets you.

keep working because I’m that way. I like to work. I’m going to think about retirement and stuff. I’m too young to think like, I’m never going to retire. I don’t want to say that at all. But when I think about it, I do, I still want something to do.

I don’t want to just wake up and do nothing. That does not sound very fun to me. I don’t know what I want to do yet, but I’m hoping to follow in your footsteps here where it’s, it’s continuing to find those things that you enjoy doing that pull both levers, man. Obviously y’all want to keep making money and growing ourselves. Same time. I want to enjoy being human too.

Tyson Dirksen (16:31)
Right.

Micah Johnson (16:50)
I want to enjoy what it’s like to be here.

Tyson Dirksen (16:53)
Yeah, I mean, you hit it on the nose. Development’s great because you’re really doing, wearing so many different hats, right? You’re doing the design, which is really fun and exciting. You’re looking at, you’re bringing in financing, which is complex and interactive with many different people. And then you’re actually using your hands building it. Well, sometimes as you get bigger, you’re not necessarily using your hands, but you see the built product go up.

Micah Johnson (17:19)
Right.

Tyson Dirksen (17:19)
You see an actual

Micah Johnson (17:20)
Right.

Tyson Dirksen (17:20)
product. It’s not just something on a computer screen. And then you get to market it and sell it. If you’re passionate about it, that’s the easiest part. It’s really easy to sell something if you believe in it. If you’re trying to sell ice to an Eskimo, that can be difficult.

Micah Johnson (17:35)
Right, exactly, man. that’s honestly, it’s what really makes it sell well, is what I’ve noticed. Like someone selling you something that they really believe in, there’s just an energy to it that’s different all the way down the line. You just interact with it. And especially when it comes to real estate, cause it’s like human beings are using it. That’s who all this stuff is for, unless you’re building a zoo, I guess. But like it’s that that’s who it’s for. Like the energy you put in, does, it stays there, it goes through it, right? A little bit of the woo factor, but I believe that man, cause you, you.

It’s just the project itself. How many things, even how you handle the hard things going on, like the whole way it gets done. What’s the statement, how you do anything is how you do everything. Right. And it’s, really has an effect on that overall product and how people experience it for years. Now I want to dig into one of the projects that you’re excited about. Cause I thought it was cool as heck when you were talking about it, take us into the one of the ones you’re doing feasibility on right now. That’s it. What’d you say? It’s.

Tyson Dirksen (18:16)
Yeah.

Micah Johnson (18:34)
Eco region community. I had to write a note down when you said it to see if I got it right.

Tyson Dirksen (18:37)
Yeah, it’s a regenerative

eco community in Central America. That’s all right. I’m dyslexic as well. So yeah, it’s a great project. It’s just four and a half thousand acres on the coast of actually Nicaragua on the Emerald Coast.

Micah Johnson (18:42)
it’s like, you got me I said it backwards.

Tyson Dirksen (18:57)
and on two of the best surf breaks in the country, if not in the world, because Nicaragua has 300 days of offshore winds, so it’s amazing surf. That’s how I found it, because I was down there surfing. But the project’s great because it really allows me to bring in all the details like you talked about into the project.

Micah Johnson (19:10)
OK.

Tyson Dirksen (19:19)
I’ve been in building science and sustainable development for a long time. we are doing things like soil to form. So that means we’re actually using the soil to build. We are sorry, we’re in feasibility. So we use the soil to build rammed earth walls, which are great for a climate down there where you have tropical weather. So you have thermal mass that help you mitigate the swings in temperature or humidity that changes.

Micah Johnson (19:38)
Mm.

Tyson Dirksen (19:50)
We’re going to do farm to table, on-site farm, do agritourism, so it’s experiential. We’re even doing forest to, as I like to say, forest to frame. So actually what we clear, we’ll use for wood in the building. We’ll have a small little mill slash maybe mass timber mill on site. So these are all ideas, obviously, what comes to fruition.

Micah Johnson (20:07)
that’s cool.

Tyson Dirksen (20:15)
we’ll see, but you know, labor’s cheap down there. So a lot of these things are easy to implement. ⁓ And it’s just a beautiful spot and we’d build a resort and then a of homes and ideally a community for the employees as well. So again, this is early feasibility analysis, but it’s looking promising. And whether it’s this year or next, that we actually take down the prop.

property we’re looking at maybe put an LOI out soon but it’s one of those things that like you said about the athletes and restraint the most important thing in life and business is saying no to things whether it’s no for your own time or no for a project that might take too long might be too difficult you know there’s so many different factors of why to say no but

It’s fun looking at these things and running the numbers and running the models and coming up with renderings and ideas. So yeah, that’s a, that’s a cool project.

Micah Johnson (21:19)
That is a cool one. And I want to, just got to tap on the fact that the part about saying no, because it’s interesting how true that statement is, especially in a world where, you know, when you’re getting into motivation and things like just say yes, know, just say yes, be open to life, be open to life. And I don’t know who said this. Maybe it was Warren Buffett, someone I was watching, but they said, first you got to learn how to say yes. And then right when you learn how to do that, you got to learn how to say no again, because

Tyson Dirksen (21:48)
Yeah.

Micah Johnson (21:50)
Opportunity is everywhere. Like when you open yourself up to it and decide, okay, I’m going to get into something it’s freaking everywhere. And saying no becomes absolutely essential to being successful because it’s, we only got one life. You only got so much time, especially when you’re doing a six to 13 year projects, man, like what do really want to spend your life doing? These aren’t small choices. These are things where you’re really participating.

So the bigger the project gets, right? know, a flip you got 90 days. Okay. You’re not losing much, but the more that you’re going along saying no is really what keeps you in that game. Right. It just, it just does. I’m so glad you said that out loud because it’s, it’s kind of counterintuitive, but it’s what keeps people here. The ones that are out quick. They said yes to everything got into a terrible deal, lost all their money. And now they’re, they can’t play the game anymore. It’s it truly is powerful to learn to say no.

Tyson Dirksen (22:28)
Yeah.

Micah Johnson (22:46)
I appreciate you saying that,

Tyson Dirksen (22:48)
Yeah, I mean, you’re right. Like early in your career, you want to say yes, or whoever said this, you, whether it was Buffett or not, you know, earlier in your career, you want to say yes, yes, yes, because you want to learn as much as possible, but that’s typically when your money’s not on the line. And then you want to say no, because you want to stay focused and disciplined. So yeah, it’s, it’s, but it’s still fun. And this is where you’re, you’re, you know, the risk reward curve really comes in.

Early feasibility has the least amount of risk, right? But the biggest importance ⁓ on the long term of the success of the project. So the more you can put into those details and thought process at the beginning of that curve, right? Because as that curve drops, you have less input when it comes to construction.

Micah Johnson (23:21)
Hmm.

Mmm.

Tyson Dirksen (23:35)
So at the beginning, you have the most input and the most value comes like that, right? So you have very little value coming out of the biggest impact, right? Because you’re putting the least, sorry, not the biggest value, the least amount of costs are at the beginning, right? The costs go up. So your input comes down, your costs go up because all of those decisions are back here.

Micah Johnson (23:51)
Gotcha.

Hmm. Hmm. It is. It is. love the way you described that. Dyson, man. These are the kinds of conversations that I can have for a long time, especially because my best friend’s name is Tyson as well. So when I just say Tyson, I, it’s like I’m talking to them. So I really appreciate that too. But man, I really appreciate your story, your insight. love hearing folks and what they’re working on the business. So for those that are listening in or watching that want to learn more about either the development company or the advisory company, what’s the best way for them to find you?

Tyson Dirksen (24:09)
yeah.

Yeah, so the development company, Evolve Development Groups at Evolve-US.com, the advisory company, Dorada Advisories at Dorada-Advisory.com, and then I do my own, or my team and I do some research as well, kind of as thought leadership, and that’s at TysonDirksen.com.

Micah Johnson (24:49)
Excellent, man. Thank you for sharing. So if you’re watching or listening in, check out those links. They’re going to be in the show notes. Like I say a lot on this show, we’re not just bringing in random people. These are people that are professionals at what they do. You want to learn from someone that’s doing it, that’s living it out, actually doing it in their own lives. So check these websites out. These are projects you’re interested in. Want to learn more about check them out, reach out. That’s again, that’s how we’re all successful here. We do this thing together.

So Tyson, I appreciate you man. Thanks again for being with me. Appreciate everybody out there for being along. If you got value out of today’s episode, please like this episode, share it with someone else you think you get value out of it. And if you’re not a subscriber yet, you know what to do. Click that button, follow along with us here. We appreciate every single one of you that do. We’ve got more conversations coming up with operators just like Tyson. People out there building a real business in the industry. Thanks for being with us today. We’ll see you on the next episode.