All Forum Posts by: Ashvin Dewan

@Percy N.  Correct. Very bullish about the land. The parcel is about 17,000 sq ft. To really unlock its value, a developer would need the entire footprint to pull together a high-rise building that's worth their while. I don't think subdividing would leave enough area to build. 

As you guys have noted, many developers that have approached are more interested in buying the land outright. Of the few that were still willing to play along, the proposal I mentioned was the most fleshed out with architectural drawings, zoning approvals, and lots of pre-development planning in place. I guess I am just not clear as too whether the proposed equity split is fair. What I was trying to establish was whether there were some norms in these type of partnerships. Or, are each and every individual deal so unique that they can't be compared? I can counter with a higher equity share, but my goal was to go to the bargaining table informed and with some realistic expectations in hand based on what other developers get for their sweat equity. 

Thanks to all so far for your insights!

Thanks everyone for your sage advice. We have considered at length the multitude of options with respect to cashing out vs partnering. Fortunately we have the luxury of taking on some risk for the potential of higher return. I agree that cash out is the safest and most straightforward. However, we strongly believe in the land and don't think there is a better investment available for the money if we will pull out. I recognize there is tremendous risk in pursuing a development and lots of possible pitfalls, but we hit the jackpot with the location and to us represents once in a lifetime opportunity to remain owners in a prime parcel of urban city property that every person I have consulted with in real estate has agreed should be held on forever given its appreciation potential. 

Having said that do any of you have any feedback on the proposed equity split? How much should these developers be allowed to share in the cash flow. I know it is very difficult to assess without all the specifics, but what I am looking to learn is what is common place in partnerships. Does the split proposed of 60% equity and only 20% of the cash flow once stabilization seem fair?  

Thanks again for your help! I can always count on the wisdom of the Bigger Pockets Community!

Scott, here are the answers to your questions in bold

Originally posted by @Scott Choppin:

@Ashvin Dewan

Thanks for your post.

A few questions to get oriented:

1. Where is this project located (just need the city)? Washington DC

2. What type of project is it (industrial, commercial, multi-family, etc) Multi-family

3. Is the developer small and local, or big and national? I would say medium size. This is their first project out of Michigan. Have developed previous multi-family and hospitality projects

4. Who established the land value at $3.0M? If you did, based on an appraisal or what valuation method? Based on over 20 offers we have received. That is pretty in line with the offers we have seen. 

5. Has the developer given you a proforma?  Yes. Pretty conservative numbers in the model based on surrounding properties

If you are going to JV your land, you absolutely need to see the model, in fact, if you have it, or when you get it, make it generic, but maybe think about posting it here.

I am not trying to have you disclose proprietary info about you or your family. You cannot make an informed decision without underwriting the deal itself. The work to make sure their assumptions are correct goes beyond what we can do here on this post.

The proforma is the most important tool that we have to assess any project. When we propose land JV's we always show the total proforma underwriting.

Generically, you putting up 2/3 of the equity and getting 18% of the back end sounds low. I can't show too many specifics here on the forum, but basically, by year 4 of operations projecting about 17% return at the split proposed of 18% of cashflow. The developers will be clearly taking home a lot more of the cash. I do believe they are entitled to it since they are unlocking the land's potential, but my biggest concern was how little the proportion of the split is. This land can generate so much cash I was thinking 35% split of the cash flow to us, and 65% to them was a little more equitable. That would put our return to around 34% for us. 

The items to underwrite in the model are:

Rents

Op Expenses

Soft costs and development impact fees

Const. costs

Timing (entitlements, construction, lease up, etc)

Rates and terms on debt (your land will set behind the lenders encumbrance)

Developer fee deferral if any

Developer fee true equity

Development cap rate or NOI/Cost

Assumed exit cap rate

Let's stop there, there are a million more questions to be asked.

~ Scott

Thanks Scott for all your feedback!

Scott, your post could not be more timely. I could use some advice/analysis on this deal I am having difficulty assessing. I will explain the scenario first and then give you some numbers to consider...

Basically through good fortune and luck our family owns a plot of very attractive land in the path of urban development. Currently we run our business in a warehouse on the land. Our land first jumped in value when a professional sports stadium was build two blocks away about 10 years ago. Next year another professional soccer stadium being built on the other side of us will open. The cherry on top is last month a road redevelopment plan with green belts and walkways with a landmark bridge was announced in front of our property. All of a sudden multiple developers have been approaching us about the land...

For many different reasons, rather than cashing out completely, we started listening to developers interested in partnering with us to construct on the land. What I am having difficulty determining is how much sweat equity a developer should be entitled to. Basically our land is going to be contributed towards the equity in the deal. Our land comes out to about 50% of the equity being footed. Although we are contributing 60% of the equity, the experienced developer we are most interested In partnering with is proposing we receive only 18% of the cash flow once the property is built and stabilized. Looking over other development deals I would have expect cash flow proportion to be more in line with the equity split up front, pari-passu. I understand that there is a premium the sponsor is entitled to and therefore they deserve an oversized chunk of the pie, but I thought given the amount of our equity contribution, our cash flow split should be at least 35-40% for us. Is it common to give experienced developers such a premium for their sweat equity? They are already getting a development fee. The sponsor argues that they get credit for bringing the millions of financing their reputations allows them to secure to get the project done. They calculated that our equity contribution represented 12% out of the total project build out cost (3 million/25 million) and were giving us a bonus and granting 18% of the cash flow to us. Per the conservative proforma, at 18% of the cash flow, that should give us about 10-11% return by year 3.

TOTAL PROJECT/CONSTRUCTION COST $25,000,000

LAND COST $ 3,000,000 (CONTRIBUTED BY US)

TOTAL EQUITY (INCLUDING LAND) $ 5,000,000

CONSTRUCTION LOAN $ 14,000,000

MEZZANINE LOAN $ 6,000,000

The developer is getting a fee for the project. In the Total Construction budget, there is a line item of $1,000,000 for the development costs.

I am not sure what other details are needed to answer my question but I am feeling like these developers might be trying to take advantage of the fact that we aren’t that experienced in real estate deals. I am hoping to try and determine whether there is some expected norms in a real estate development deal that i can use to gauge this deal.

Thanks in advance!

Thanks for the insight vic reddy!

Originally posted by @Vic Reddy:

Ashwin,

Few questions -

1) Is the developer assessing ur land value at 15% of total project cost? Do you also pay for anything else like development fee?

Perhaps the easiest thing to do is to explain with some of the numbers-

TOTAL PROJECT/CONSTRUCTION COST $25,000,000

LAND COST $ 3,000,000 

TOTAL EQUITY (INCLUDING LAND) $ 5,000,000

CONSTRUCTION LOAN $ 14,000,000

MEZZANINE LOAN $ 6,000,000 

DEVELOPMENT FEE IS A LINE ITEM IN THE TOTAL CONSTRUCTION COST OF $1,000,000

Hello Relatively new to commercial real estate and therefore having some trouble analyzing a deal. Was hoping to draw on the collective knowledge of bigger pockets to get an opinion! Basically through good fortune and luck our family owns a plot of very attractive land in the path of urban development. Currently we run our business in a warehouse on the land. Our land first jumped in value when a professional sports stadium was build two blocks away about 10 years ago. Next year another professional soccer stadium being built on the other side of us will open. The cherry on top is last month a road redevelopment plan with green belts and walkways with a landmark bridge was announced in front of our property. All of a sudden multiple developers have been approaching us about the land. For many different reasons, rather than cashing out completely, we started listening to developers interested in partnering with us to construct on the land. What I am having difficulty determining is how much sweat equity a developer should be entitled to. Basically our land is going to be contributed towards the equity in the deal. Our land comes out to 50% of the equity being footed. Although we are contributing 50% of the equity, the experienced developer we are most interested In partnering with is proposing we receive only 15% of the cash flow once the property is built and stabilized. Looking over other development deals I would have expect cash flow proportion to be more in line with the equity split up front, pari-passu. I understand that there is a premium the sponsor is entitled to and therefore they deserve an oversized chunk of the pie, but I thought given the amount of our equity contribution, our cash flow split should be at least 35-40%. Is it common to give experienced developers such a premium for their sweat equity? They are already getting a development fee. The sponsor argues that they get credit for bringing the millions of financing their reputations allows them to secure to get the project done. They calculated 15% of the cash flow based on the proportion our equity contribution represented out of the total project build out cost. I am not sure what other details are needed to answer my question but I am feeling like these developers might be trying to take advantage of the fact that we aren’t that experienced in real estate deals. I am hoping to try and determine whether there is some expected norms in real estate development deals. Thanks.

basically a 15000 sq ft warehouse with attached office space 

it's an industrial type property with garage and office space. 

And does anyone know, is there such a thing as a HELOC equivalent for commercial properties?