Analyzing a Creative Land Development Offer
One of my PR Wealth Retreat graduates has a valuable piece of land located in Southern California.
He contacted me and asked me to give him my thoughts about a creative offer he received from a small group of developers.
The offer consists of a reasonable upfront amount of money cash, followed by a percentage of the profit that could be realized when the group develops the land into a strip center and sells it.
He asked me what I thought?
(As a side note- the model to “educate” my members and open a line up for Q&A or case studies has tremendously increased our members investing successes. UTILIZE the Network! That’s what I’m here for.)
I want to share with you how I helped him analyze the offer through the Risk Element of three parts:
- 1. Who is doing the deal?
The group must be honest, experienced, and connected (to get things done)
- 2. What is going to be done?
It has to be something interesting for the city and it has to make financial sense in a reasonable time frame.
- 3. How are they going to do it?
They have to be experienced, with a sense of urgency, and very focused on budgeted guidelines and safety issues, so as to not run into lawsuits.
The ideal scenario is to find the best group of people to work with, on the best possible project, with the best possible terms.
The dream is to complete the project on time and within budget but again this is a real estate development deal and dreams usually turn to nightmares.
My suggestion to my investor-student is to collect the maximum he can get up front and then another fixed amount later on once the project is completed and either refinanced or sold.
That other fixed amount should be recorded as a lien against the property and it should not be based on any net profit but the gross selling price, because how is he ever going to find out if they ran the expenses higher to decrease the net profit?
This deal structure is a lot safer and with a lot less hassle and headaches. The developer group is still getting a good deal because they do not have to fork all the money upfront and it is a win/win.
As an investor, you must always find a creative way to structure your transaction in a way that makes it a win/win. Just don’t rely on other people’s honesty or competence in a development project.
If you want to maximize your profits, minimize your headaches. Any other way for this land sale could leave you wide open for many variables and unpredictable outcomes.
Wishing you the best deal structuring especially in land developments.
Cherif Medawar
Founder
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