Buy and build

[Jessie Dunn]

I am curious as to how the process works for buying land and building an apartment building on it.  How does financing work? How much cash and/or collateral would we need? Can buying the land and construction be wrapped up in one loan? I'm looking for direction as to where to begin, websites to reference, etc... I have a million questions. Thx!

[Christopher Cruz]

Originally posted by @Jessie Dunn:

I am curious as to how the process works for buying land and building an apartment building on it.  How does financing work? How much cash and/or collateral would we need? Can buying the land and construction be wrapped up in one loan? I'm looking for direction as to where to begin, websites to reference, etc... I have a million questions. Thx!

Jessie, I do development in NYC, and every market is a bit different. It is a hairy beast. My advice would be to team up with a seasoned vet to learn the ropes. So many variables are involved in develop projects and you must understand every moving piece to underwrite the project and make a sound decision on whether a project is worth moving forward. Don't touch a project that will return less than ~20% IRR.

Generally the first thing you want to do is zoning analysis on the land you are looking at. You can hire at attorneys, architects, or read through local master plans. Is it approved for the project you would like to develop? If not, you must take it through town board for variance approval - this is VERY time consuming and expensive. You will need an architect to draft conceptual plans. This could take up to 24 months depending on the market. In NYC we have expediters who make a living off of this process. 

Assuming your land is as-of-right or approved for the project you are going to develop, you will then need to think about construction costs, soft costs, and financing costs, revenue your project will generate and compare that to the market. If your project is coming in under a cap rate spread of 200 bps (this is what my firm uses in NYC so I'd assume mass market should be much higher spread), then ditch the project. Assuming you move forward because the underwriting checks out then you need to secure financing.

Securing financing is easier said than done, and unless you have years of experience, successful projects and a fat net worth you most likely will not get financing from traditional banks or get rates that slaughter the economics of the project. Depending on your experience, net worth, the bank you approach, you can get 50%-75% of total development costs financed. 

Financing is typically structured as interest only debt with 24-36 month term, which will convert to traditional financing upon stabilization and a handful of covenants including DSCR, debt yield, etc. Good luck working with a bank on funding requests and draws, you may find yourself financing the construction for periods of 14-30 days until bank approves on a draw.

As someone correctly stated above, if land is not approved for the project you will not get financing from a traditional bank. What we have done in the past, is lock up a vacant lot in contract contingent upon approvals from DOB. There is land financing out there which typically requires large down payments, I'm not too familiar with terms because we typically purchase land in cash. 

It is also important to understand that even if you receive construction financing, your equity goes in first. Meaning if you get construction financing of 65% on a $10MM all-in project, you will need to come up with $3.5MM before the bank will allow funding requests. Land value will count towards your equity contributions.

Dream big, ask the right questions and never agree when someone tells you it's not possible. Best of luck.