Need help: How would you structure this deal?

Question

Hi BPers,

Haven’t been here for a while, so glad to see there are so much things going on here. I'm a flipper also done some new development work. Need some help for this deal structure?

It’s an infill land development deal in bay area. Good neighborhood.

I had it secured 12 months ago, it can be subdivided into 3 lots(takes about 1 year). The local single family house market has appreciated 10-15% over last 12 months.

The numbers are like this:

-Land: 2.65M

-Soft cost: 300k

-Public work and utilities: 210k

-Hard construction cost: 2.86M

Total before construction: 3.16M

-Construction loan: 2.86M

-Loan interest: 229k

Sell at 8.8M

-Selling cost (commission): 396k

-Gross profit: 8.8 – 3.16 - 2.86 - .229 - .396 = 2.15M

ROI 2.15/3.16 = 68%

Total project length is about 2 years. 12/12 for entitlement/construction

My role:

• I secured the land one year ago, put in 220k deposit and 30k for some prelim work and due diligence.
• I will raise all the money,
• I will manage from start to finish, I also have a GC license but will only charge a minimal project management fee.

How would you suggest to structure the deal between me and my passive money partners? Also how to factor in the land appreciation in this deal? I believe the land is appreciated 15% minimum for the time I hold; there is rarely any land/lot on market.

Thanks a lot.

Gene Chen · Answer

Hi Richard,

If you wouldn't mind sharing, how were you able to lock up this lot for $220k?  Was it on the market or privately negotiated?

Sounds like a promising project.  Best of luck!

PS - I'm currently in the entitlement phase for a 3-unit subdivision in LA.  Would be great to connect and share mutual learnings.

Sean Pincus · Answer

Typical fees

- Developer Fee of 2 - 7% of Hard Costs & Soft Costs, especially if you will be doing all the re-zoning work

- Construction Management Fee of 10 - 15% of Hard Costs

If those are built into your numbers the way you structure the Private Equity money is up to you

1. Pay a Guaranteed IRR of 10% and give them a small percentage of the back-end (do the waterfall structure as 90/10 for hurdle 1 and then 20/80 once you hit your guarantee

-or-

2. Give them more of the project for 0% preferred equity (70/30)... however, I only do this type of deal if I have nothing into the project because the clock won't work against me.

There is a million ways you can slice up the pie. I develop property with zero of my own money, just my vision and construction management skills. I therefore will personally guarantee the loans, collect a construction management fee, collect a developer fee, and give up 20% of the project for 10% guaranteed IRR.

If I hold the deal, I will refi the investor out in 3 years. If you're smart, build additional hard costs budgets into your financing and have the bank fund it, you can pay down your equity earlier so the IRR doesn't kill you in the end.

Call me if you have questions... just send me a PM.

- Sean

Bram Spiero · Answer

As far as a fair managing fee is concerned, 2% up front on the amount invested and 20% of profits is something I've never had people scoff at.

Richard Z. · Answer

Hi Bram, thanks for the comments.

Yes I've done deal like this. The one I had before there is no such longer holding period so I'd like to see how factor that in; the other thing is how much the managing fee is relatively fair from neutral viewpoint. I know by end a working deal for everyone is better than anything.

As for loan, I prefer stay clear and free for land. The time spent on entitlement could be longer if things change. It also takes longer here. and easier to get construction loan.

I will add a picture later and spent more time here and get to know more fellow investors.

thanks.

Bram Spiero · Answer

Hi @Richard Z., welcome to BP!

If you're confident about the numbers for the deal, offer your partners a fixed rate of return, well bellow the 68%. Offer property as collateral for the loan.

Have you done deals like this before? I've found that finding people eager to invest their money is not as difficult as getting them to lend their money to me.

Do yourself a solid and stick a picture up on your profile, you'd be amazed what that will do for getting people to interact with you.

Good luck and keep us posted on how this deal develops.