How exactly are deals like this made?

Question

I live in Detroit, and there is a lot of brownfield redevelopment going on. I was wondering how deals like this http://www.modeldmedia.com/developmentnews/watermark9307.aspx, and this http://www.naiop.org/developmentmag/features/indexkk.cfm made without the original developer giving up over half of their equity in the process. I always read about these big time developers who are unable to get financing, pulling together these big pool of investors. But what I dont understand is how it works. Do they retain ownership or is each investor now have an equity stake in the development? Can someone help me out with this?

Diane Menke · Answer

Tiara,

I see you are still in college? Its great you are so focused already. Why don't you look into some construction management classes and/or interning or being hired by a "mover shaker" development company in your area. You would learn a lot in that situation and they may even help with continuing ed for you.

Keep in mind Fed and State dollars that will be funneling into RE and developent over the next 8 years. You want to get in on that I think. As an African American woman, with skills in property management and RE sales, you would be very well positioned to help yourself and any business that hired you gain access to those dollars.

My .02 and keep us posted on your successes!

Diane Menke

Tiara Murray · Answer

Wow, thanks for the info Diane. I will check those resources that you gave me.

Diane Menke · Answer

Tiara

Don't forget that these brown field developments are specialty projects in that they take poluted property and turn it into safe habitable and useable property. This is not for everyone.

We have a company in the Philly area names O'Niel, this is all they do = brown fields. This is their specialty. They are in fact offered these properties by municipalities up and down the East Coast now, because they are specialists and the town wants to clean itself up.

These developers will site special local, state and federal tax breaks as part of their 'equity' in a particular deal. So maybe they have 10 - 15% equity that is based on these tax breaks. Makes getting into a deal like this easier right? Looks better on the statements. Bank likes to see "instant equity".

Another tax break our area is a property tax break. I is for "new construction" and its transferable for 10 years. This encourages buyers to buy these properties, vs existing houses. So again, the government is assisting the developers here.

These large developers can also go to the local construction unions and they dicker about what they will pay. The unions want to keep people employed, they want a slice. Locally I hear stories about closed door meetings where the builders will promis X number of hours to each union (roofers, plumbers, carpenters....) and then after that, they can hire who they want, who may be cheaper.

I think you can learn more about these areas of development in several publications. One I used to get for free was called Multi Unit Investor. There may be one for "brown field investors". Why not Google that? Professional Remodeler Magazine will cover stories on these from time to time. Check with your local NARI chapter or Remodelers Advantage.

Another thing you can do to learn more, is get a job with one of these specialists. I don't know your personal skill set. But imagine what you might learn being a personal assistant or secretary to someone doing this?

Keep in mind these guys often have to comply with "minority employment laws" to get these government dollars. I own a registered female owned construction company and this is how we get a foot in the door of local non profit projects. I know a large local builder who does government funded jobs, and they set up a woman with a construction management degree, right out of college, as their "woman owned construction business". So this might be another angle you can pursue.

Good luck to you. 
Diane Menke

Tiara Murray · Answer

Thanks for clearing that up Jon. I guess I didn't take into consideration salaries and management fees. I also didn't realize that you can still make tons of money without retaining much equity.

Jon Holdman · Answer

Why do you think the original developer is not giving up have their equity?

These are two quite different projects.  The Detriot  project looks like its a pure residential development.  The developer could get bank loans to provide the funding.  Or, they could get investors.  Or, as in a deal I was involved in, both.  In my case, a bunch of investors each put in money, giving us a fractional ownership of the company.  The, the company turned around and got a bank loan for about double what we had all invested.  Then it bought a property.  A mini storage, in our case.  Our rehab was much smaller than in this Detroit project, but a similar idea.

I'd guess in developers in that Detroit project used a higher percentage of equity investors.  They mention a presentation:

That leads me to think they did a registration for their sales of securities.  Pretty tough to fit under the exemptions to avoid registration with such a large and seemingly public presentation.

The investors would kick in money, and get shares or membership units in the company.  The developers might have some of their own money into the deal, too.
They would run the company.  They would get paid management fees, hefty salaries, and most likely, numerous other sorts of fees to operate the company.  Not having a 50% equity stake doesn't mean you can't make plenty of dough.

Think about it. Most large public companies are ran by managers who have only a small equity stake in the company.  Most of the equity (i.e., shares) belong to others.  For example, insiders hold only about 13% of all Microsoft shares.  Bill Gates personally owns a little over 7% of Microsoft shares.  These big developers are big businesses.  The fact that they're manufacturing real estate (condos, officer towers, buildable lots, etc.) doesn't really make much difference.

The Atlanta project appears to be largely bank financed.  So, they have came up a plan, gone to a series of banks, pitched the plan, and eventually got funding.  Notice they say they spoke with 1400 groups about the project.  This is a huge project, with lots of interested players.

You might find Trump Strategies for Real Estate: Billionaire Lessons for the Small Investor interesting.  I've not read it, but I've heard him speak, and he tells about doing big deals like this.  I've retold that story to others, who've said "that's in his book".