All Forum Posts by: Jay Vance

“Wholesaling” land development deals is not that uncommon. Typically, a developer enters into a contract to purchase a piece of raw land contingent upon receiving the desired approvals and closing occurring 30/60/90 whatever days after such approvals. As he is obtaining the approvals (and once he is far enough along to have a good sense of what is going to be approved) he will start marketing the approved project to a more institutional developer (i.e. a national home builder, a large multifamily developer, etc. depending on the nature of the project). After obtaining all approvals, he will assign the contract to the end-developer. 

This typically works best when the assigning developer has specific local knowledge, permitting abilities, relationships, or expertise that allows him to approve a project that is more valuable than the “by-right” development. It also requires a substantial up-front cost for engineers, architects, and other consultants that can run in the $100k’s. For a savvy developer, this is a way to get a huge return with only the permitting cost (and usually some hard money) at risk. It also requires the ability to convince the land owner that you are the real deal—something that is increasingly rare these days. 

This doesn’t sound like one of those opportunities. 

1. Plan for expenses to rise 2-3% per year along with rent growth.

2. How confident are you in the property taxes? If they assess at closer to your costs, at a 32.17 millage, you could be looking at a much steeper bill.

3. Plan for a minimum 95% occupancy even after stabilization. There is always going to be some turnover which will lead to at least marginal vacancy every year. 

4. If I were looking to invest, I would really want to see a projected expense report broken down by category (repairs, maintenance, common area utilities, snow removal, turnover, admin, planned capex).

5. Make sure you account for all soft costs during construction and financing--are you going to require permits or variances to change the use to 14 units?  Appraisals and 3rd party reports for your lender? Etc.

6. Not sure why your mortgage is only 3 months for the first year? Aren't you going to need some of the balance to purchase the lot, pay for the construction, etc? I would break it down month by month in the construction stage based on the draws you are going to require.

7. How old is the building? Any asbestos to remediate during construction?

8. Stylistically on your pro forma, usually I see NOI calculated as a line, then mortgage, then cashflow rather than showing the mortgage line above expenses and taxes.

@Chris C.

Before diving into it too deeply, I want to make sure I understand your plan: Are you converting the existing two-story mixed use building into 14 apartment units or building a new 14-unit structure on the razed site?

I think that @Ben Leybovich brings up a very good point. IRR forces you to focus in on what your ultimate exit strategy will be. But, that's also one of the risks I see some syndicators (especially in low cash-flow, high appreciation markets) falling into because the future is tough to predict. If you are projecting cashing-out at a 4-cap five years from now, your IRR's may look great but your future may be grim.

One question that I don't fully understand is how one should think about IRR when there is no exit strategy, i.e. some of the super high net worth family offices in Manhattan real estate. These guys buy properties and never sell. Obviously you can use terminal value of future cash-flows after a certain point, but I can't see their IRR's being very high. Although I'm a long ways away from being wealthy enough for this to be an issue: how should people who are planning for legacy assets (ones that they'd like to pass down to their children's children) evaluate IRR and deals?

Consult with a CPA on the details, but the construction of the house would be a capitalized expense which must be depreciated. As such, your business can expense the cost evenly each year for the useful life (27.5 years per the IRS) of the property. So if the house itself excluding land is worth $275,000, you could depreciate $10,000 per year and that is considered an "expense".

This is certainly doable without paying off the balance of the owner’s note, although it can be risky for the seller. Banks will not usually lend if the seller has a superior lien on the property. The way I have seen it done is that the seller must agree to subordinate their mortgage to the bank’s construction loan.

After you build and sell/obtain permanent financing on the house, the bank gets paid first then the seller gets paid. The risk for the seller is that if you default, because their mortgage is subordinate to the banks, they will have trouble recovering from the foreclosure proceeds. 

A few due diligence thoughts in no particular order:

Construction costs: I’m not familiar with BC, but at first blush the construction costs seem low to me (coming from New England). What is the square footage of the proposed building? For 17 units on 10,000 sqft, are you relying on podium level parking? I would recommend asking for the estimate documents and ideally independently verify the quotes for the construction  

Exit Strategy: What is the strategy for this deal? Is it a develop and rent? If so, make sure to factor in lease-up costs and holding costs in your models. How does the anticipated post-development cap rate compare to the market cap rates for existing multifamily deals in your market  

Approval risk: does the underlying zoning allow the proposed use? Do you require special permits or variances? Would your investment be contingent upon gaining all necessary approvals?

Deal structure: are you purchasing shares in the developing entity/corporation? How’s is the corporation structured? What level of control do you have if the owners disagree? Are you getting any kind of preferred return? What kinds of fees is the “sponsor” receiving if any? Is the “sponsor” also acting as the contractor and charging the partnership for it?

Partner: what level of experience does he have in this type of development? What does he bring to the table other than the deal itself?

Overall, there’s a lot to swallow on a deal like this. It could be a good one, but I would encourage you to dig deep into the numbers of the deal itself and do your homework on how it is structured. 

Realize this is an old thread but for FWIW, a lot of the ranges you hear will depend on how you calculate per square foot. If you look at most of the new construction that comes on, they will advertise finished basements or third floor bonus rooms in their square footage (and some even garage space). But most of the builders I know tend to talk about their psf costs in terms of two floors of living. 

The other big variable when builders talk about cost per sqft is site work—are we talking cleared, level lot with sewer or a wooded lot on septic. If the latter, figure on a minimum of $25k to build a septic system, and 10k to clear your lot. Most people won’t include this when they give you a cost psf—it’ll just be the “bricks and sticks.” Regardless, you can safely figure on $200/sqft all in on a mid grade new build.

I agree with @Charlie MacPherson . Your best for negotiating may be looking at what other new construction lots have sold for (check out the new construction on Redfin, then track down the deed to determine what the builder paid for it) and using those as your comps for the tear down. 

Thanks for the insight on condos. Not sure whether it’s the same here in Mass. But it’s definitely worth thinking about the ease of selling individual townhouses vs individual condos if we were to condominiumize and sell as an exit strategy. 

The proformas look pretty much the same, but I am assuming the same annual per expenses unit expenses in both scenarios. If either townhouse or garden is significantly cheaper in annual maintenance or other expenses, that would help drive the decision. 

I'm looking working on permitting a small multifamily rental project in the Boston suburbs. It's an infill site, so the number of units is limited by parking and dimensional constraints, but it looks like we could get somewhere around 16 units in a townhouse layout or 24 units in a garden style layout. This would be a develop and hold project for us.

Does anyone have any knowledge of the different long-term ownership/management costs between a townhouse style vs. garden style project. My hunch is that the townhouses would have lower maintenance costs because there is no interior common areas/hallways to heat or maintain. My sense is they would also be more attractive as each unit would have a separate entry. But other perspectives would be appreciated.

Any advice would be appreciated. Thanks!