My first multifamily development

[Khizar Hanif]

Hey all. 

My dream has always been to get into commercial development and recently, I have found a developer/mentor whom I am doing my first multifamily deal with. The developer is giving me an opportunity to partner with them since I have a solid network of high net-worth individuals who I will be raising capital from. This will be a great opportunity for me to team up with a seasoned developer and learn the business from the ground up (literally) while bringing value in terms of equity partners. That being said, since I am starting a new endeavor which I wish to grow in and eventually be able to do on my own, I need to ask the right questions and make sure this is the right deal for me to begin with. On the other hand, it is very crucial for me to build a solid relationship with my investors right from the get-go. 

What are some questions and points to hit on when partnering up with a developer? These guys know what they are doing and are giving me the opportunity to join them, but I am also bringing in my own equity along with equity from my network, so I believe I am entitled to ask questions even though it may seem like I am interviewing them. 

Class B multifamily (garden style)

1 BR-90

2 BR-70

3 BR-5

Total units 165

Land: 6 acres @ $8/ft

Land cost: $2,090,880

Construction cost $115/ft (could be as low as $105, but we will use $115 to be conservative) = $14,875,250

Club house/gym/swimming pool = $375,000

Soft costs = $1,000,000

Developer fee = $1,800,000 (split 50/50 between developer and myself)

Total development cost = $20,141,130

Revenue

(90% occupancy) monthly = $182,750

Extras = $8,250

Total revenue = $191,000/month

Expenses

Interest (5.5%) = $64,500 

Taxes and Insurance = $45,000

"Extras" = $30,000

Total expenses = $139,500

"Monthly profit" = $51,500 

"Yearly profit" = $618,000

ROI 12%

After Construction loan is paid off and we move to a bank loan we start paying P&I--->

Expenses

Principle + Interest (5.5%) = $86,500

Taxes and Insurance = $45,000

"Extras" = $30,000

Total expenses = $161,500

"Monthly profit = $29,500

"Yearly profit = $354,000

ROI 7%

Capital raise of $5,035,283

Bank loan of $15,105,848

My questions/concerns:

We have only met once to discuss the deal and I was given the basic numbers. We haven't gone into much detail yet, but I have a few things to point out before even asking for advice from you guys. 

1. I would expect a proper excel model with line items broken down instead of just saying vaguely for example, "extras" on the expense category. But I am just assuming these guys are old fashioned and haven't brought on any partners as developers before so they are fine with a simple model that meets their needs.

2. Where is PM, utilities, payroll, leasing commissions, landscaping and upkeep, repairs, capEX, vacancies, and marketing?

When I asked them about that, they said all the above are included in "extras". Is it possible to have all of those expenses covered with $30,000? 

Here is what they broke down for me:

PM (4%) roughly $8,000

Payroll including leasing commissions (5%) roughly $10,000

Utilities, Landscaping, upkeep, and marketing is covered by the remainder of the $30,000

Since its a brand new development, they haven't allocated reserves to Repairs and CapEX. Which I don't agree with. We plan to hold and refinance, so for the long term I believe those reserves should be created.

3. Is the 5.5% interest on construction loan possible? I was told it should be closer to 8% on a construction, interest only loan. 

4. Overall I need to ask them for a detailed breakdown of the line items. 

What are some other questions for me to ask?