​Seeking JV Equity Partners to Complete High ROI Land-Flip Deal

[Chris Newman]

I own a 14+ acre piece of land. platted out as four city blocks full of undeveloped lots. It’s located next door to downtown Everett, WA, just 30 minutes north of Seattle. I bought it as an investment in 2010.

Thanks to a pair of recent back-to-back windfall changes in local land use regulations, this land is now worth about ten times (or more) than what I owe on it - which is roughly $250k. I’m looking for three 25% equity partners and, due to some extraordinary motivation, know well that I’m leaving a lot on the table here.

There are two separate equity values in this property, which will both be realized when they are sold off into their respective markets: 1. The land’s value and 2, The value of its Transferable Development Rights credits, which are actually about 80% of the total equity.

It is not necessary to sell the land in order to sell the TDR credits, or vice versa. But, the credits need to be certified before the land can be broken up with individual lot sales.

I’ve made previous offers to sell a share in this land, with the same equity division and price, but those offers didn’t also include these high-value TDR credits. This post is the very first time that I’ve put it all on the line. The value of what I’m offering is now about 5X higher, at the same price.

There are variables that will impact the final two-part sell-off profits and nobody knows exactly what those will be until they clear escrow. But I’ve bracketed the total at somewhere between $3.76 million and around $7 million. I’ve spent years analyzing this thing down to the DNA level and that’s not a wild guess, but my best professional conclusion from the many local market economic facts. So, losing this deal right at the finish line means losing a LOT and that’s the source of my very high motivation.

For a couple of unavoidable reasons, in order to see this deal through to the conclusion, most likely within a year, I need to raise $250k in quick bridge funding in order to carry it through to the finish line of checks in the bank.

But, a quarter-loaf is still much better than none and even this will still put me on a self-funding fast track to doing many more of these deals. What matters the most is where you end up, not what it cost you to get there.

So, I’m now offering a 25% vested equity in the entire property, and all of its values, for a total investment of $83,000. Everything will be transacted within bonded escrow.

There are three of these quarter-equity positions available, through the LLC, which I own, that officially owns the land. This new funding will be first directed at 100% debt-elimination and then covering minor operating costs until the cashflow starts.

I would very much prefer local King and Snohomish county active REI partners, who can somehow contribute to help to move things forward to the final payoff. But, that's not mandatory.

Each of the three new joint owners can be either individuals or an investment group of its own. So, if $83k is still rich for your blood, I'll do what I can to hook together other BP members to work out their own sub-JV.

I’ll be keeping the remaining quarter of the ownership and, subject to the will of the majority, continue on as the managing member, leading the final cash-out stages. If there’s anyone more qualified to lead the deal conclusion than myself, I’ll happily let them take over. But, since I’m the original inventor of this newly-opened local land investment niche, with 5+ years invested into research, I’m not holding my breath.

I’m trying to keep this post very short, so I’m sparing you a couple of dozen pages of detailed economic analysis that lead to my value range conclusions, which I’ll be happy to share in the due diligence stage.

But, I should at least share an outline of how these double-down windfall profits came to be and what they mean in terms of economic values:

1. Surrounded by bulk acreage parcels that cannot be divided below the zoning’s normal 10 acre minimum, this property is actually platted out (in 1909) as four city blocks, that are filled with pre-existing individual legal lots. Thanks to some recent regulatory changes, these lots can now be broken up for individual resale without any further subdivision. This individual lot status has been verified with the local planning department.

Comparing apples-to-apples, on a per square foot value basis, small lots like these are both extremely rare and worth at least 4 times as much as bulk acreage that cannot be split up. I bought the larger property at the bulk acreage price.

Conservatively, at a bare minimum, if sold off individually for hobby uses, these lots should net around $700,000. But, I think that they can bring nearly twice this much as a permanent farmer’s market/agritourism commercial retail mall. That's a pre-permitted use here.

2. The second windfall was the launching of the county’s new Transfer of Development Rights program, with the Sending side completed in late 2013. You can download the county flyer on the program from http://snohomishcountywa.gov/DocumentCenter/Home/View/8118

This new “resource land conservation” program enables the owners of cheap qualifying Sending land, like this, to detach the unused residential development rights that they contain (in the form of certified credits) and then transfer them to high value urban growth Receiving areas.

This transfer is done through free market sales to end users, just like physical real estate. The final selling prices will be whatever the seller and buyer agree to, and particularly based upon the economic value that the credits deliver to the buyers. Selling terms and strategies will also impact market value and there are options there, too, which I won’t go into here.

The end-users/buyers will be developers who want to build high-density multifamily and mixed-use mid-rise projects in the new TDR credit Receiving wide-area rezone. This rezone has also been in the works for years and is just about to come online.

Presumably, this will all finalize on December 16, when the county council passes the final rezone resolution. That passage is what will spark into life the active market for these credits. i.e. This is some major land use regulation change in one of the hottest markets in the nation, we know exactly what’s about to happen and we know that the opening gun is just around the corner.

This TDR-side of the land equity is where things get really interesting: Thanks to the legal lot “ungluing” of windfall #1, the great abundance of small lots here also means that this land qualifies for an extraordinary number of TDR credits. Instead of what would normally be 8 Receiving credits, this land will yield 304 of them. That’s not a misprint: It’s 304 credits, that I fully expect will have a market value of somewhere between $10,000 and $20,000 each.

For a short breakdown on how TDR credits work on the Receiving side, please see https://www.biggerpockets.com/files/user/ChrisNewman/file/boosting-snohomish-county-multifamily-development-profits-or-increasing-affordability-with-tdr-credits

I'll let you do the math to arrive at an anticipated investment ROI, at both ends of the estimate range. To make it interesting, assume that my lowest estimates are still high by 50%.

What needs to happen once the land’s debt is cleared is to begin the TDR certification process. This will start with doing a minor boundary line adjustment on some of the smallest lots to bring them up to credit-qualifying size. Then, the straightforward 30 day credit certification process. I’ll do all of this work and pay the fees.

Hopefully, by the time that this is all wrapped up, I’ll also have some credit buyers lined up. Since I won’t see my big payoff, either, until the credits get sold, I’m working hard on this side, too.

Lot pre-sales efforts will also begin immediately. After certifying the credits, we can start finalizing the lot sales to commence the seller note cashflow that should total at least $8,000/month of interest-only, then ballooning in five years for the $700k or so selling price.

Ultimately, these dozens of 1st position notes will be equally distributed to the members to either keep, sell or play in one way or another. I plan to keep mine for the steady diversified cashflow from highly-motivated buyers.

What will lock in your participation will be 10% ($8,300) deposited into escrow, with 10 days for due diligence, before depositing the balance. As soon as all three quarter-equities are sold, we’ll push the button to close on everything. At the end of escrow, you’ll own a recorded 25% equity in both the debt-free land and its TDR credits. Then, we follow the agreed deal plan to its conclusion.

If you want to discuss this more, please PM me.

Thanks!