How to Get the Last 20%

Question

The bank will lend you 80% on a development. You can either put up the remaining 20% yourself or bring in investors.

If you can't or don't want to put up the money yourself and you can't find or don't want equity partners, what are your other options? I know there are mezzanine loans, but to be honest, I don't fully understand them.

Jim Macedon · Answer

Yeah, it's the age old question, if you need experience to get a loan, how do you get experience?  I've developed somewhat of a relationship with a local bank.  Built a 4plex.  Now I'm trying to do a small condo community on 2 acres.  Hopefully that's not too big of a jump for the bank.

I have some people who may possibly want to invest and I have a pretty decent amount to throw in.  I just really don't want to give 70% of the profits to someone for doing nothing.  But I guess that's just the way this game is played.

Adrian Chu · Answer

Get the seller or a third-party to finance you the remaining 20% as a second position loan.

Marla B. · Answer

@Jim Macedon don’t think of it as them doing nothing. They are, in fact doing something monumental: taking a big chance on an unknown kid. For every time they strike gold, remember that they also lose some of these at bats as well...

Jaysen Medhurst · Answer

@Jim Macedon, if you don't have experience doing this as a developer or contractor already, you will have a very difficult time convincing a lender to give you the loan at all, let alone anything over 80%. Ground-up development is one of the riskiest loans for a bank to make.

One route to explore, though, is pre-selling the units. Basically, you get buyers to make a down payment and commit to buying a unit once finished. You then have some working capital and can take those commitments to the bank and lower their risk. Of course, this requires some money up front from you. You'll at least want the land (or a iron-clad agreement to buy) and will need to spend some money on legal, sales, and marketing.