Order for an STR syndication: "Land 1st, Vision 2nd" or "Vision 1st, Land 2nd"

[Jeff King]

Hi BPeeps!

My partner and I want to create our very first friends and family syndication (506.c, IIRC) of STR's. Here's the high level:

Our goal is to develop 1-4 luxury SFR's across 1-4 lots, starting with empty lots (with utilities run to the lots already). We will likely hold these properties for 10 years and then sell for a 70/30 split with the investors. 

The Seller (aka land owner aka community developer) is offering private financing for the land: 8% fixed, 30-year rate with 20% down payment (DP) with no pre-payment penalties. Lot prices are the cheapest now and will increase as seller opens up the next tranche of lots in the next wave or phase. Acquisition has been going at a decent clip and the lots are selling pretty fast. Oh, and this is also an international deal, the land is outside the US though in a very stable market. 

The "Land 1st, Vision 2nd" path

We've been operating under the assumption that we will need to acquire the land sooner rather than later, i.e. before we've raised investment capital. So, we create a Sponsor, LLC which owns the land (well, 20% of it, that is), the juice starts flowing and we're servicing that debt, fine. Next, we build the vision and start shopping for investors. We create a holding company for the syndication (Syndication, LLC) for investors to buy into. We raise enough capital to pay off the land loans, development, sponsor/mgmt fees, etc. (BTW, I'm assuming I want to pay off the loan b/c I will/can structure the syndication to defer payment on the capital investment loan until Year X where X is at a point in time when NOI has stabilized and we have positive cash flow. LMK if my thinking is off here.)

Here lies the rub: Assume partner and I don't have enough extra cash lying around to invest in Syndication, LLC because it's all tied up in the land!. I was assuming that wouldn't be a problem because we could use the principal returned to us after paying off the land loan and then turn around and invest it in Syndication, LLC. But my partner says that isn't possible. Rather, he says that if we, as sponsors, want any of the recurring rental profits (disbursed quarterly or yearly, likely) and sales proceeds of disposition after Year 10, then we need to have shares in Syndication, LLC, period. Well, sure, that makes sense, but I just figured there was a creative way through this. Unless he's wrong, of course. :) 

Is this approach not possible? That is, can we secure the land now and then build the vision for investors after without having to set aside more capital for Sponsor, LLC to invest in Syndication, LLC?

Another option we discussed was setting up a land lease between Sponsor, LLC and Syndication and we only raise enough capital to cover development costs. Deal structure would be slightly different -- We wouldn't take any recurring rental profits (since we'd be receiving lease income instead), and we don't sell at Year 10. We buy out the investors, instead. I'm less a fan of this because I think it's a less attractive investor offering. (Do you?)

The "Vision 1st, Land 2nd" path

I think this path is more aligned with traditional syndications, right? That is, where Syndication, LLC owns all the assets, investors have voting 'A' shares land and Sponsor, LLC has non-voting 'B' shares in Syndication, LLC. The rest is pretty straightforward so I'll peanut butter over those details since this OP is getting long. 

The obvious risk is that, at best, we're forced to buy the more expensive lots in the last tranche (assuming all the current ones have sold at this point) thereby forcing us to raise more capital than we would if we acquired them now. At worst, ALL lots disappear while we're raising capital, and then this was all for naught. No bueno. 

So, BPeeps, what do you think about all of this? Should we or can we acquire land first and use some tool to make a path of making Sponsor, LLC have B shares in Syndication, LLC without additional capital? This would be my preference, of course. Believe it or not, this whole thing will be a side hustle for me. I'm returning to Corporate America in a few weeks after having been on paternity leave for the last several, and I'm afraid I'll have even less time to devote towards underwriting when that happens. Rather, having the land gives us the breathing room, and the monthly mortgage bill gives us the motivation to continue progressing through the steps. This whole deal is my first big step of breaking free of the golden shackles I'm in now and charting my own course of doing what I love - sustainable development. 

Many thanks in advance!

/j

(p.s. this is my first BPost ever, so please forgive my manners if I've broken any forum etiquette or traditions in these 'hallowed' halls. :) I posted in the commercial RE forum b/c this one seems to have the most expertise on syndication. )