Submit your development deal for review and analyses

[Scott Choppin]

Submit your deal - any deal - here for "underwriting", let's see how we can collaborate, review, comment, harass (kidding), and give input on your next up and coming development deal.

Scott

[Scott Choppin]

@Johnny Quilenderino

Thanks for your question about the condo project. 

First, a couple of points of feedback. You are calling this "value add" but from your description, you would tear the houses down, so this is a development project. Value add would be if you rehabbed the houses and rented them or resold them, value add assumes upgrade to existing structures. Second, if you are tearing the houses down, then the 24 unit condo approval the developer obtained is a "condo approval" not a "condo conversion". Condo conversion would mean converting existing apartment units into for-sale condo units, again, with tearing the houses down this is a development project.

Questions:

1. Purchase price is 1.3MM for the land plus the condo approvals? Reason for asking, if luxury condos sell for 120k, then the 1.3M purchase price is 54k per door just for land, which is nearly 50% of your cost basis. This sounds very high. We like to underwrite land on for-sale homes and condos somewhere between 20% and 25% of revenue. So if you sold units at 120k, 20% would be 24k. Remember, you have to pay for land, const. costs, soft costs, interest carry on your loan, permit and development impact fees, your profit, and fit that all into 120k per door on the unit sale (BTW, 120k per unit walking distance from Chesapeake Bay sounds cheap, but I'm not familiar with the market).

2. Has the developer done any construction drawings beyond the condo approval?

3. Has the developer completed all the legal and technical parts of the subdivision for city of Norfolk or state of Virginia subdivision requirements?

4. Will the architect who did the design for the project approvals stay on board to do the CD's, and what is their charge for that design?

5. Have you run any numbers on the deal? I always run numbers very first thing, to see if the deal even works at all in the beginning. You'll have to ask around for hard costs and fees, but most land brokers in your area should have some guidance on this for sites that they've sold recently. You can also call local small and midsize GC's for their budget guidance on hard costs.

You can do a very simple proforma as follows:

Revenue from sales

Less 

Broker fees for condo sales, closing costs for unit sales, warranty costs for units sales

Land, closing costs for land, broker fees for land

Soft costs, architecture, civil eng, MEP/S engineering, soils report, Phase 1 if needed, developer insurance, prop. taxes during const., marketing, subdivision costs, HOA formation and reserves

Hard costs - GC contract costs, overhead, profit, insurance

Development impact fees, permit fees, school fees, park fees, etc.

Loan costs for const. loan, interest carry, loan fees, appraisal costs, lender legal, funds control

Developer fee

Equals (what's left) - developer profit, normally shared between equity investor and developer. 

6. Why is the developer selling? What's wrong with the project that they want to sell? Maybe nothing is wrong, but you ALWAYS want to ask yourself this question. What issues does the developer avoid if he sells to you? Permit issuance constraints/lottery, soft market, lack of const. loans or equity, condo defect liability (maybe more of a CA thing), or whatever else. You don't want to be the greater fool.

Get back with these answers and we can go to the next step.

~ Scott