Help, My Project Is Dying From A Lack Of Capital!
First, let me say thank you to the moderators and the founders of this site! Without the education and encouragement that is available in this forum, there wouldn't be any challenging business situation facing me now (that's a good thing).
I found a willing seller with a property with a center road already in place. We submitted for subdivision and for all neccessary zoning board of appeals variances - got em. We have 50 lots approved for duplexes that are direly needed in the market where we are. Total project cost: $11M. ARV: $14M - and we hedged our estimates on absorption rates.
We have gotten quotes on utility mains, sitework, taxes, driveways, houses... everything basically, and used it to produce a solid pro-forma. We also did a very full market analysis, pre-selected a realtor, everything except identify a solid funding source.
So I drafted a loan proposal, and instantly recieved responses that it was very thorough, and while they don't usually finance someone with only a $1/2 million net worth on a project of this size several lenders were considering it.
My first offer came in today: they'll give 85% LTC (loan to cost or $9.35M) at 3 points above prime/36 months interest only/ plus 3 points origination (rolled in I suspect). We have almost no cash to put in (like $100K max), and we had structured the deal so that we could do it ourselves if we could had a $2.1M revolving line of credit. For instance we have a take-down schedule with the land-owner that allowed us to buy the land in five segments @ $90K each. We had the utilities planned to go in in stages, and the houses weren't going to be built faster than the market could absorb them.
Question 1: if the most we will owe on the line of credit will be $2.1M at any one time, shouldn't 15% of that figure ($315K) be enough to capitalize our portion?
Question 2: bearing in mind that we are (contractors) new to development, with a very low net worth, are we getting raped on that finance deal?
Question 3: if we do need to come up with $1.65M of our own capital, how do we do that? even if we sold stock under RegD I can't imagine we'd have enough profit left over after buying out those investors for the deal to have been worth it... for any of us
Am I back to the drawing board?
First, it seems like you need to keep shoping for a lender.
For all the talk about TCI about how this group or that group are unethical or incompetent or overpaid my own vote for sleaziest single segment of the real estate industry are loan brokers.
in my experience lenders who " don't usually finance someone with only a $1/2 million net worth on a project of this size" but who have "several lenders . . .considering it." fail to perform way more often than not. This is loan-broker speak for "I'm trying to keep you happy and interested while I shop around and see if I can actually find anybody to do this deal but the reality is I haven't got a clue."
That the loan broker is shoping this as a $10 million deal rather than a $ 3 million one is also a bad sign. He should know better.
I'd look for a $3.00 million line (perhaps secured by a first on the whole parcel) rather than a $10 million mortgage.
Reasons:
1) the $1-$5 million lenders seem slightly less flighty in my experience than the $10 million guys.
2) No point in paying points, etc. for the big line if you don't need it.
3) Look for a lender who will let you run your GC fees and other in-house costs as part of the total "costs" of the deal. These typically add up to 10-15% and including them in the cost and then not paying yourself until the end makes your numbers look a lot better.
4) Even assuming that you ended up with a $2 million line and a private investor group for another million your $3 million net looks like a stupendous rate of return on this smaller investment. In addition at some relatively early phase you can cash out the private guys and roll over the profits to finish out the project, this keeps a bigger portion of the whole in your pocket.
CommercialKing,
Thanks for that advice, as usual, it appears to come from a solid base of experience. I'm glad to have the help available.
I was considering adding in all of the GC fees onto my pro-forma, and as you guessed, I hadn't yet. The way we wrote this deal up also shows a contingency, and a developer's fee. I would assume the lender would generally allow the developer's fee, like the General Contractor's fee to be counted as costs, and we can forgo as much of our salaries as we have to.
What about the contingency? If we have a 7.5% contingency that we have added to the hard costs of the project (only 7.5 because we are using a panelized house system that has pre-set prices) and the contingency doesn't materialize can we use it as an equity position?
Thanks again.
[addsig]
[quote]
On 2004-11-23 19:32, commercialking wrote:
Depends on the lender of course but I have had lenders allow me a 10% GC fee, a 5% developers fee and a 10% construction contingency fund. If you can then get the lender to also go to an 80% LTV you are in great shape.
FHA has a guaranteed loan program which allows you to borrow 95% of costs to build apartment buildings where 20% of the units are set aside for low income families. They will allow a 10% GC fee, 7% developers fee, 10% contingency fund. 3% engineering fee, 3% architects fee. [quote]
Mark,
I was glad to read your post. I've been trying to figure out what I should charge my project for a development fee, and how much the banks would allow me. I'm asking for only 2.3%, so I feel pretty comfortable after reading your figures. As a matter of fact, next time I'm going for 5%!
Thanks again,
=CT=
gleaontyler,
where is this deal at and what do you intend to do with it when it is built out ?
I am working on a 120 acre development and the lender is quoting similar LTV numbers. However, my solution to the cash problem was to put together a solid managment team which consisted of a few other HIGHER net worth individuals who also put some "skin" in the game by being limted partners. This made the bank feel better by having more experienced team members in place AND more of our cash in the game to make it work. The partners will get an excellent return on their investment and everyone should benefit. We'll keep our progress posted as it progresses.