Ground up development; apartment or senior living complex

[Jay Mitiguy]

Hello world of BP. As you guessed from the title, I'm looking for insight on how to dig into a potential ground up development opportunity I was presented with yesterday.

A little background on me: been investing for 5ish years, focused on small multi-family and some mixed use. Have successfully bought, rehabbed and sold several properties after 2-3 year holds and continue to hold a few properties that I want to keep long term. I have experience with decent sized rehabs on mixed use buildings, and put together a financing packages that included grants from the state and city where we did the work.

My question now is, how do I begin to dive into a much larger deal? I recently moved markets (and my home) and in that process came across a potential deal where the current land owner would give the land for development for equity in the deal. It's a little over 10 acres and is zoned for high density res (18 units/acre), and is 2 miles from a very well known university in NC. Being new to the area, and not fully understanding their processes for development, where would you suggest I get started? Who should I be speaking to, and how would you go about underwriting a project like this? I found an financial modeling tool on A.CRE that seems very robust, but there is a lot of data required that I don't have and honestly wouldn't know the best person to get it from.

Any input would be greatly appreciated as I hopefully take my next step into the CRE/Development playground!

Thanks - Jay

[Barry Ruby]

Jay, doing a ground up development requires a great deal of additional functions and skills sets than those involved with vetting and acquiring an existing property. One major example of this is the amount of time required to build a project versus acquiring and even rehabbing it. Ground up development of a MF Rental Project typically occurs in the form of a "3 Act Play" which unfolds as Pre-Construction, Construction and Lease Up which hopefully results in positive long term operations.

Act 1 needs to be expressed in terms of functions, time, players and capital. The snap shot below shows functions, time and players.

This snap shot shows the capital needed to perform the functions with the players noted above.

As to your question about syndication, yes development deals can be and often are syndicated. However, in order for the deal to "come together" in addition to having control of the property and having a complete package that shows cost, income and performance on a project and stakeholder level, you will most certainly need to demonstrate capacity to execute the deal. This normally requires being able to show experience with the kind of deal you are syndicating in the form of a successful track record. This last piece presents "chicken and egg" situation...how do you get the track record if you need to show you've done this in the past?

The answer is to find a developer to partner with. Your way into this deal is to get the property under contract and find a developer that will take you under his/her wing that will allow you to stay in the deal for a negotiated piece in exchange for bringing the land AND performing a set of ongoing functions that become part of your job description as your role in the development process. You compensation for this kind of arrangement should include compensation (for brining the land and your work effort) AND just as importantly, the boost you will acquire to your learning curve.

That said, I took the liberty of using the factors you shared with Greg Dickerson and found that, as you correctly suspected the deal doesn't work based on them. This doesn't mean that the deal ultimately won't work. A few factors about the deal for you to know and consider are:

1. 1.  The project will cost ~$32M and at a 75% LTC require $8M in Equity
2. 2. A JV with the Landowner will do you a little good as land contribution with a $1M value still leaves $3M to be covered. Introducing the Landowner may work for part of the Equity, but also may prove to be more trouble than its worth by adding a layer of ownership with the landowner that may prove problematic for the $3M investors.
3. 3.  Using your cost, income and expense factors produces the performance noted below on a Project Level. The only ways to make the project work is to reduce first cost and Op EX and or increase income.
4. The best way to solve the balance of cost and income is to start by doing an income driven pro forma. It is easier and more logical to determine what is felt to be the rent rates than try to drill down into Cost which includes Hard Cost, On Site, Off Site and Soft Costs at this early stage of the deal.
5. 4. By refining rent rates you can determine Income can be capitalized, which as you have done in your example. Once you have capitalized value you can run a residual analysis by deducting everything (including a development profit from the capitalized value. This exercise will tell you how much you have to spend on the above referenced costs. 
6. 5. The best chance for this deal to work will be to raise rents as justified to a level you feel comfortable with and then play around with reducing the $130 psf hard cost you cited to see if these factors align to make a feasible project.

I have recently created a ground up development pro forma that can easily run this analysis and forms the source of the snap shots above. Let me know if you'd like to do a screen share session to play with the numbers to see if the deal can get to a place that shows acceptable returns using adjusted variables.

Best Wishes

Barry