California Development - Unique Negotiation

[Dean B.]

Hi BP community, I've posted here before with some really great answers from a lot of really experienced investors. I would love to get some feedback as I'm approaching a negotiation that was unexpected.  whether or not you have experience in affordable housing, I'd love to hear some feedback as per the actual numbers and deal structure. I know many of you have had creative transactions in the past.  Here's the rundown:

We have a 4 + acre parcel and have been working on the project for a number of years. We're about to head into working on construction documents with an estimated construction cost of 27 million for a 140 unit rental market rate project. Valuation is projected to be somewhere in the 47 million dollar range once built.  Lots of challenges to get from where we're at right now to putting a shovel in the dirt re: lending source, endangered species, parking issues, ETC.

With the above in mind, I received a random phone call from an affordable housing developer last week. They own approximately 40 large projects across California that is 100% affordable housing. I verified their information and they are a very successful affordable housing development company..... They reached out to us because we have a density that meets the requirements to potentially qualify for affordable housing tax credits with the application ending on July 1st. We are in the middle of negotiation with the assumption they are able to secure these tax credits based off of securing access to our site per the agreement.  In short, they want to tie the property up for approximately three months pending results of their application. The only risk to us is that it ties the property up for three months. Note: they have had much success obtaining these credits in previous projects and just completed a project in our local area. 

There's a lot of hypotheticals here but what started out as an initial $3m offer ("most we can do"), was pushed up towards $5m.  all this with my explanation that we originally were targeting $11M. I then came back with a number of $8M as a stretch for our partners.  They seemed very eager to play ball and I don't want to leave any money on the table given that we have a project they can make some money on while at the same time we can make some money not having to deal with developing the project ourselves. All while giving the community something they desperately need. based on our pro-forma, if this is converted to an affordable housing project it's looking like somewhere in the $30-32M range keeping in mind this is a hold of at least 50 years as affordable.  

1. We know the figure we hope to settle on but I'm curious to hear feedback.  My read on this is that they have the team and resources to throw at the project to make it successful and even the chances of receiving the credits I think are above average.  What do you think is a reasonable final amount?

2. we are considering adding in a good-faith non-refundable deposit since they will tie the property up for two or three months. So We're trying to get some idea of what makes sense based on the projected valuation. My guestimate is somewhere in the range of $50 -100 k.  Does this seem reasonable?

3. Any other creative things we should think about including?

While I hope this works out, my assumption is it's a little bit too good to be true.  However, we have the land and the density - both of which don't really exist in this area.  

And go.