Need advice on raising 20M to fund horizontal utilities on 237ac entitled plot

[Garry Miller]

Afternoon Team!

I hope all is doing well. I'm working with a Developer who has several lots across Texas, all secured using loans. I was wondering how to go about locating funding to assist with us breaking ground on these properties and going Horizontal i.e. doing the infrastructure and utilities. We have funding for Vertical development but it only gets "unlocked" once we can show progress. We have entitled and approved plans for 237 SFH 2400sqft, and a builder ready to go. I'm looking for ideas on how to get over this hurdle so we can start building on the first phase of homes.

[Jay Hinrichs]

Quote from @Don Konipol:

Quote from @Garry Miller:

Quote from @Mike Grudzien:

Garry,
I'm surprised that working at this level of real estate development and deal size that you and your partners don't have at least a dozen lenders in your back pocket that deal at that level and like your work....
I'm interested in seeing the answers here.

 Great question  - we've had a lot of success with these not quite dozen, but 7 lenders and they're all in on their respective deals to finance the Vertical construction, secured by the housing assets yet to be built.  This request is for a short term, construction/bridge loan so we can get through the infrastructure phase only.  More transparently - it gets us out of the land bank holding phase now.  Available cash is servicing the debt, with construction partners on the sideline waiting to be put to work.   Thanks for the clarifying questions - I hope this opens up some more perspectives about how to solve for this opportunity! 

1. You’re trying to replace equity you don’t have with debt.  The “horizontal”construction, while sometimes can be partially financed by debt depending on developer track record, is more often regarded as the “skin” in the game put in by developer either theirselves or thru a syndicated equity offering. I get requests for this kind of financing all the time from mortgage brokers who don’t understand the equity / debt relationship.

2. Texas is somewhat unique in that a bond can be issued which will cover some of the cost of the infrastructure development. The bond will be paid by an improvement district tax paid for by the property owners.Their are two underwriters who handle these type of bonds.  However, qualification is quite difficult because the underwriters are selling these bonds to their longtime clients and excessive defaults will kill their business.  The first thing the underwriters consider is the financial position of the developer.  Unless that’s solid they will go no further. Secondly they require the developer to place 25% of the bond issue amount in escrow, so for a $20 million bond issue that’s $5 million.  Then if the total does not cover full infrastructure development they require a plan that covers the additional amount required. 

The particular development I’m involved in spent about $400,000 on soft costs to be able to provide the necessary information to the underwriter - this was in addition to all other soft costs usually incurred in development. 

Great discussion.. Bond financing while it works in my experience is time consuming and like you said expensive.. I did 4 of them in CA back in the day..  1915 act and Mello roos. these were late 80s and even back then the Mello Roos one I did in Nevada county Ca the soft cost were in excess of 250k U had to have very expensive appraisal you had to pay bond council and then you had the investment bankers who sold the bonds. The one I did in Nevada county was the first one they ever  did in that county.. But today Mello Roos is very widly used in CA. and Frankly one of the only ways developers can get these deals done as the cash needs for infrastructure and offsites is just so high they need this added leverage. 

Oregon has Bond issues but only the cities or counties can use them private developers cannot expect for rare instances.. This makes development in our area very tough for guys like me that are not publicly traded or a large regional developer.. so the public companies and the large regional have kicked all us little guys to the curb basically. I can get horizontal for my projects but my commercial bank requires the dirt to be paid for and these are multi decade connections along with substantial deposit relationships.. 

I think Garry might want to consider phasing this into as small of chunks as possible  trying to land one huge loan is pretty tough.