How to raise a fund for a long term development?

[David Coronado]

BP,

I'm interested in understanding the deal structure for long term development projects between private money investors and developers. For example if I were to be interested in buying and developing properties in part of a city, that a city has rezoned from industrial use to mix-user corridor, office space and high density. Essentially establishing a downtown for a city that has never had a downtown. What is the typical deal structure for a investor who is investing into a 10 - 20 year development project?

I understand a project of this size would require a full time team of Architects, Urban Planners, Commercial construction team etc in house or hired out with prior experiences.  Along with a master plan of phases and approach for approval with the city. 

I'm just curious to understand the deal structure for long term developments between developers and private money investors? 

If you have any book recommendations that would be great too. 

Thanks BP Community,

David

[Joel Owens]

If you do not have experience in those level of projects you need to JV and be a junior partner.

Ground up usually is about a 3 to 4 year process for mid size developments and small stuff can be done in 1 year or so.

Typically the investors on ground up get no returns the first 3 years or so. These are typically investors of great wealth who do not live off the cash flow for investments. They are looking at cash flow and great equity growth on the back end.

Investors that need money today tend to invest in existing fully leased out projects collecting a preferred return year one of 6,7,8 percent.

Vale add with 50% lease up is generally nothing the first year to maybe 4% pref. As the property gets turned around in 3, or 4 years then pref hurdles up to 6,8 percent etc. but you have greater equity growth. Ground up generally nothing the first 2 or 3 years then pref starts coming in and greatest equity growth on the back end.

I do not currently sponsor fully leased up buildings as you are a glorified property manager with little upside for yourself. Any rent growth and cap rate compression can be eaten up by resale costs in a 3 to 4 year time horizon to exit. Used to at the bottom of the cycle you could buy something full at a 9 cap and let it compress to a  7 to 6 cap. These days you have to create the equity through value add or ground up development to get a high cap rate to cost so your spread is there when you exit.

I know developers 40 years in the business. I am in my 40's and they there 70's. I would not attempt such a project as it is fraught with huge risk. You are talking decades so 1 to 2 full economic cycles could occur. Why not work on something smaller first?