Creative Financing For Developers
Could some of you who have used the creative strategies discussed in previous posts ( controlling land for development)explain how they work-not just theory wise?
1)99 year lease- I read that this is a way to secure land for developement by leasing the land from the owner for 99 yrs and developing improvements, would this work for land used in subdivision development since the homes will be owned by the homeowner?
2) Owner finance, subordinante note to a traditional lender.
3) Option to purchase- Secure the longest option possible, at least a year. Bank then would finance the option to purchase.
4) Partnership in which owner "puts up" land in exchange for a % of deal after construction complete.
For those of you who have used these techniques how hard were they to impliment? What if the land in question is being sold thru a realtor, how then do you propose these strategies as I am sure no agent wants to entertain any strategy that seems to delay an outright sale and commission.
Thanks I am learning alot on this forum.[ Edited by wmwealth on Date 05/22/2004 ]
Well I've said it before but I'll say it again. There is way too much concentration around here on forms and techniques and methods and how to "structure" the deal. For the most part what form of agreement you will use becomes self-evident if you come to an understanding of what the parties want. Whether you do an option or a 99 year lease is mostly a function of what the seller wants and when. Worry less about how you will structure the deal and more about how to talk to sellers. When you have a willing seller come back and talk to us. That will be time enough to worry about how to structure your transaction.
A basic understanding of these different forms is nice but there are millions of variations. I once did a deal with a management contract with an option to purchase built in. Nobodys' going to give you that form here-- you make it up when you need it to meet some need that the seller has.
The first step is always to find a willing (even a motivated) seller.
A most excellent and true reply commercialking! Very well said.
Well with that being said I find it a little un-nerving to go out pursuing investment land without first having some general idea of what my options are, never mind how to structure them. I am aware that most people on this forum post at their leisure and not as an obligation ,so to post a development deal in the making ,and waiting for someone to post a "creative strategy" to my question would not be a smart business move. Most investor tend to pull from a tool belt of creative financing options and I would like to aquire the tools of trade myself so as not to have to depend on the forums members to be available to assist me.
If this forum is not the right venue to call upon the experience of other developers then point me to where I should seek to gain this knowledge.
Sorry to put anyone out-
WMwealth....
I think what commercialking is trying to say is that investors tend to obsess about how to "structure" things, as if structuring the deal was the end-all, be-all of developing real estate. How the deal is structured is relatively small potatoes compared to the big picture work and goals in front of a development property. Books could be written on the topics you questioned about. Decisions on how to structure a deal need to be made as negotiations move forward and depend on the needs and wants of both buyer and seller.
All that being said, your questions are legitamate ones to ponder. Alas, I am not the one to address all of those strategies and do them the justice the deserve.
Well, I know I posted looking for structuring strategies and was hoping for a good answer on this particular topic because I DO have a willing (and motivated) seller. Although my seller has changed, this one is much more willing than the one I started with. (sorry if I'm pestering, I just have a solid background and knowledge regarding about 90% of this deal and want to catch up on the 10% I feel I'm lacking -- financing primarily) So, let's take my specific example, with not exact numbers and see if each of the possible structuring strategies can be applied and what benefits one would have over another.
DEAL: Commercial acreage with DRI in place for what I want to build. Seller wanting an inflated price to fund other business objectives. Willing to work with me so that he gets inflated price and I can meet my business goals as well. I'm willing to pay inflated price IF I can leverage it in such a way that in the long run it's "cheaper" than HML or standard equity deal.
So, take acreage worth probably 20 mil, asking price 60 (I DID say it was inflated). I'm thinking something more like 40 for actual deal. Let's not be a stickler over the numbers tho as I'm only going to offer what's going to work and make sense and that's not really the topic of this original question. Besides the DRI alone makes it more valuable to ME than it might be to others (although I'd really like someone to answer my other post about DRI's in real life)
GOAL: 1-- own property outright in about 5 years with original seller out of the picture (alternatively refinance thru bank, etc., so that original seller is paid off and out); seller's goal is to get his inflated price, but he's willing to wait; 2-- be able to leverage property to obtain construction financing, this may not be the easiest project to fund so lots of land equity would be a plus
OPTIONS:
1) 99 year lease: This is the one I'm the fuzziest on in terms of structuring. If I understand it right, I could get the lease, and have the lease payments factored into my construction loan so that everything is paid for. Although a separate purchase agreement could have me buying the property at some point down the road, I don't see that this satisfies the sellers need to get his money. Am I missing something here? Wouldn't this be best if the sellers goals are more cashflow or revenue generating type needs? Also, would the construction financing for this be easier if the developer had significant equity to invest as well?
2) Owner finance -- In my case, the seller WOULD be willing to finance. However, where does that put me in terms of obtaining construction financing? I wouldn't have any equity to speak of in the deal so, while possible, wouldn't it be harder? My understanding would be that this option would be best if the seller is patient and doesnt' need the money right away, and the buyer won't need to do any additional financing that would need equity in the property. Right?
3) Option to Purchase -- Similar to 1, Advantages to seller is that would probably be a definite timeline and he'd know that he'd either have his money by a certain date, or would be free of any strings or hassles and could put it back on the market easily. Although there's advantages to buyer, for me, not seeing that this would be any more beneficial than the lease.
4) Partnership -- well this is the one my gut told me to go with to start with. Seller can get their goal of inflated price, just has to wait until the exit strategy pays them off and gets rid of them. Company (i.e. me) would own land outright and could leverage the equity in getting construction financing. Downside is I get a partner, will need to make sure exit strategy is workable so I'm not in a world of hurt in 4-5 years to pay partner off, and that inflated price makes sense from a business perspective.
So, is my understanding of these four possible avenues correct? Anyone see something wrong with my conclusions?
I definitely see that the structuring has to meet the needs of the seller AND the buyer, but maybe wmwealth was looking for the pros/cons of each so that it would be easier to match up which arrangement would suit which group of sellers the best?
Thanks for any and all insight. Everyone's time and energy is appreciated!
Here how your deal could be proposed in the 4 structure you asked about
1) 99 year lease:
Lease the land, develop it, and then sell or lease to someone waning to "operate" the propery.
Remeber, he still owns the land. so the value you get on sale (CAP rate) is not as good since the land isn't included.
2) Owner finance
you can aford (w/ loan) 60% of his price, he carries back a 2nd for 40%, and you have your deal in place.
3) Option to Purchase
I don't think this would work, as he wants his cash for other deals.
This would go like this: I'll give 1% of X for the rigjht to buy it for anytime in the next 18mo for X. (like stock options)
In the next 18mo if land values go up and or you can then finance X, you get the land.
4) Partnership
Also Joint Venture or JV.
Hey seller, why don't you partner w/ me. You donate the land and I'll donate the development costs.
We'll split 50/50, 60/40, etc. at the end.
I'm looking at a trashed SFR right next to a crapy triplex. This are surrounded by 600-700K townhouses. The land under the sfr and triplex is enough to build 14 townhomes.
HERE THE REAL VALUE IS THE DIRT.
I am thinking the JV route, although I don't like partners I don't know.
So I may finance it outright.
I have seen construction loans that will goto an 80% LTV of the "as completed" value.
I do agree, that if you wnt to do this, take the plung and make it work. I spent (wasted?) about 1 yr learning about "structure"
Hope that help.
"I do agree, that if you wnt to do this, take the plung and make it work. I spent (wasted?) about 1 yr learning about "structure""
Exactly ... I'm trying to learn all this in the midst of negotiating. If I end up with less than the most ideal arrangement, oh well, I'll at least have ended up with an arrangement.
Thanks for the replies- eveyone. I do understand that this business is about motivated sellers, but I guess what I was looking for was just a little more clarification on the strategies used by real investors/developers. I do take every post as constructive criticism and will attempt to learn from all. However I am sure that other beginners have many of the same questions I have. I do utilize other sources of information and education on the topics prior to making any posts for clarification.
Thanks again.
Here is how I have done a participation deal.
1. establish an agreed price.
2 Form an LLC you own 80% the seller owns 20%
3. The LLC contacts to buy the land
4. YOU pay all due diligence costs
5. Apply for and get a D.O.
6. 120 days after D.O. LLC closes on land and land partner gets 1/2 his price.
7 LLC develops and sells out the land.(condos, houses etc)
8. Third party debt is retired.
9. Land owner gets balance of his price
10. Profits are then split 20% to former land owner and 80% to you.
This works well and is a win win.
Gregg
_________________
Gregg Fous
[ Edited by GFous on Date 06/26/2004 ]
1) a "willing seller" who wants three times what the land is worth is not that willing. Even double the price for a 5 year buy out is stretching, i.e. a 20% roi.
2) try to stay away from long-term land leases unless they also include an option to buy. Even then they complicate a deal unnecessarily unless the seller is unwilling to structure any other way.
3) Owner financing can be done with a subordination agreement which places the sellers position behind the banks. But any smart seller is going to be reluctant to do that deal unless he's really convinced you've got a workable plan and have the ability to pull off the deal.
4) Option to purchase doesn't help you out because you are looking for the seller to subordinate his equity to your new development. No bank is going to finance your development project if you don't have title and no-body is going to finance your acquisition at twice what the property is worth.
5) Any of the four structurs CAN meet your goals. The point is that you have to find a structure the seller will accept. The real problem here (as I started off saying) is not that you don't have a structure its that you don't have a deal. You cannot pay twice what the land is worth and then "make it up in the terms" without a lot longer period than 5 years.
Paying twice what the land is worth over five years and generating 20% ROI for the original seller, in my case, it still less than what investment equity partners would be expecting ... 25-28% ROI. That is where I see the benefit to my business (as well as the ability to acquire the land and leverage it). I'm viewing it more in terms of the cost of equity participation than overpaying for the land. Since this isn't a straight RE deal, there's the bigger operating picture, it still makes sense. I'm still at the negotiating table, but obviously if the numbers didn't make sense, there's always more land somewhere. I've already walked away from one potential deal because the situation just wasn't going to work (even tho it was very sweet and would have been profitable despite its limitations).
wmwealth,
As a land broker, I would say to you that land settlements typically take a long time unless you're talking about a single building lot or the buyer is purchasing a larger parcel as-is. The real issue is not how long will the deal take to get to settlement, but what are the odds that the deal will get to settlement. In answering this real question, land brokers look at several things: is the seller's price realistic balanced against terms, are the buyer's contingencies reasonable, and is the proposed development scenario probable.
Nancy
I think the biggest thing than in my mind is what does the seller really want and when does he want it.
I have to admit that I missed the $ size of the proposed transaction the 1st time I posted.
this is a BF deal.
if paying 2x for dirt is worth the equity split. then it seems you've found a deal you like.
I forgot the numbers, but is he going to accept 20% of partnership for $40M?
It seems like to have a very good grasp on the structure, so how else could we comment?
Commercialking is right. Concentrate on finding good deals. If the numbers make sense then it is easy to find creative ways to structure your deals. If the numbers are not there then you will never be creative enough to make the deal work.
Also, always remember the KISS principle. For me the simpliest solution and generally the most profitable is to go to the bank and borrow the money for my deals. If this is not possible or if the risk exposure is to great then I look for other alternatives. But, those alternatives are only possible if I have a really great deal in the first place.