Questions About Mixed Use Development Opportunity
Maybe some of you can help me out here. I'm looking at a $1.2 M property with about 17,000 of easily converted loft space on 3 acres. Including the loft units, zoning will allow about 60 units on the property, plus some commercial space that fronts a major street. The property basically comprises a city block, so there are no access or utility issues. Anyway, I'm in the process of putting together a package/plan for lenders and investors to review. My intention would be to build 11 quadruplexes, convert the existing space to lofts, and put about 10,000 sf of commercial on the major street with one or two floors of loft apartments above that. It would then be managed as a rental property going forward. The FHA 221 multifamily financing seems pretty attractive - 90% LTVs and 40 year amortization that converts to permanent . The questions are:
1) Can anyone point me to a good description of everything that lenders will be looking for in a loan package, or actual examples that I could review? I want to make sure that I can answer all the questions before someone asks them.
2) Does anyone have experience with FHA Mortgage Insurance for Rental and Cooperative Housing: Section 221(d)(3) and Section 221(d)(4)? Are there any issues with this program that should cause me to look elsewhere? The project has good debt coverage ratios, 1.3 or better, and getting other investors to pay for at least 10% shouldn't be much of an issue.
3) If I get the seller to finance, say, 30% of the acquisition costs and subordinate to the construction loan, how is that treated in the LTV calculation?
I'm sure there are other questions and I'll post them as I think of them, but any help you can offer would be greatly appreciated.
Thanks.
I've never done a 221 d mortgage but I have done a variety of other government financing. About 8 years ago I got out of the residential end of the business over just these sort of issues.
If you can fund the deal without it you are probably better off. The bureacrats love to talk but in the end they do not care whether a deal gets done or not. If you think you are going to do this then go talk to the politicians now. It is the mayor and the senator who can get a deal out of FHA, economics are not the motive.
The good news is that if you can get it approved they will let you charge a ton of fees to the deal and pay them to yourself. By the end you won't care a lot whether the project works or not-- you will have made enough in fees to have made it worthwhile. This was always my problem. I wouldn't load up a deal with fees and as a result the bureacracy would kill me. Trust me you are going to need that 10% GC fee and the 5% developer fee and the 8% engineering fee and the money for lawyers and consultants. Not because you actually need all those services but because you are going to need to support the overhead you will need to deal with FHA.
Next. A 1.3 DCR is a great place to buy an existing building but it won't cut it for a development project.
Do you really need the rent caps and income restrictions that come with the 221 (d) money? It sounds like an interesting and attractive project. Is it located in a difficult area? Why do you think you need the FHA money? Why not just do it as a market project?
If you believe that you need the FHA money then start shopping for a loan packager who knows how to put applications together for these guys-- they love paper.
Thanks for the response, commercialking. You've confirmed a lot of my sneaking suspicions regarding the FHA route. The terms are still quite attractive, but they may be more than offset by the costs of additional time and fees.
Actually, there are no rent caps or income restrictions associated with the 221(d), but there are significant density bonuses based on the number of units meeting the city's criteria for affordable housing, which is actually quite reasonable. The DCR should actually be well over 1.3, since I have been lowballing average rents in my spreadsheets and have not been including income from the new commercial space or an old building that I foresee using as a rental facility (weddings, receptions, parties, etc).
Regarding the rental facility, the benefit of leaving it largely intact, rather than converting it to a residential use, is that I hope to use historic tax credits on the costs of renovating all of the lofts. It's not a deal killer if I don't get it, but it does amount to a substantial bonus and I've got a lot of friends at the National Park Service who evaluate these submissions.
As far as the area goes, it's in one of the only walkable areas of the city (grocery, coffee shops, bars, library, etc) and young families have generally been priced out of the few other areas. It used to be a pretty rough area, but now it's in the early stages of a pretty steep recovery trajectory...lots of strollers being pushed around by people in Gap clothes.
Have you seen a good summary fo the information lenders are going to want to see? I think I've got most of it together, but I don't want to have to say "Let me get back to you on that".
Thanks again for your help.
From my very very limted knowlege on here and also from the advise of Nancy Chadwick, it seems that the most profitable part of development is actually subdividing the lot and getting the land ready for building.
After you complete this--which I believe is probably more time intensive and risky than money intensive--you can probably sell the lots as a package to a builder (maybe even holding owner financing) and not worry about the actual contruction part of the process.
I have zero experience in this so take this for what it is worth. GOOD LUCK
My partner is a builder, and we are interested in the million dollar profit that would result from the construction and eventual sale of all of the lots with duplexes that are very needed in the area. Otherwise we would just install owner/bridge financing & sell the lots for a gross profit of about $100,000.
For anyone who might post in the future, I am seeking experience in getting a $700,000 to $2,000,000 LOC for pipline development of a subdivision. I have never gotten this type of financing, and would just like some guidance on how to get it with the minimum out of pocket that we are working with.
It is possible to find a bank that will lend on the FMV of the finished project. If you do not have an established relationship with a lender then it will be tough but you can still get it done.
Target banks that lend to alot ofdevelopers/builders, they will have a better understanding of your project. Get somebody to introduce you to the Banker, this is so much better then going in cold. Give the Banker a complete package on your project. This package should include: a letter explaining the project, the market and the exact financing that you want; an appraisal; a proforma; plats; designs; your financial statements. Give the Banker all the information that he could ever ask for regarding you and your project. Be prepared to go to several banks, you will find one that needs you as much as you need them and there is a good chance they will fund your project.
If this fails find a partner with some money.