All Forum Posts by: JP Leonard

Thanks, Kristi! Interesting podcast. I will reach out to Shawn.

@Joshua Gorsky

Yes that might be the way to go. I need to learn more how it works with condos. 
Apparently 95% of new multifamily construction is rentals now rather than condos due to arbitrary regulations by federal mortgage agencies and how those get intertwined with contractor defect laws https://www.minnpost.com/cityscape/2014/02/where-have-all-co...
"For condos to be eligible for a Fannie Mae-insured loan, developers must presell 70 percent of their units." 
Presales could actually be a great way to raise gap funding, but buyers might only want to do this with major builders. I'm planning to reach out to see if people are interested in investing equity in a condo to get it at a discount, maybe at construction cost. 
Yes, you could have a condominium of just two entities, us with the front yard and an investor for the back.
There are also tax issues. According to @Jay Hinrichs, the back yard might be a separate S corporation as developer for ordinary taxable gains and the front part a 1031 exchange for capital gains. 
Valuation is another issue. I'm trying to get a good enough valuation for the land to earn about 30-35% of the units in exchange for the land equity. This could mean asking double the value a developer might pay for a run-down cottage on a large lot. OTOH he wouldn't have to finance the land purchase or the demolition at today's interest rates.

Quote from @Chris Seveney:

@JP Leonard
Recognize also whether a bank would also lend against this type of deal.

Basically we didn't want to sell our home now and above all not get it foreclosed on if the contractor fails to perform. Also the added value from developing the lot is more in the vacant part than in the already built portion.
If we do have to sell the whole parcel, another option could be a performance bond and a lien on the property.
Looking up pros and cons of performance bonds, this interesting article comes up
https://www.lauriebrennan.com/blog/to-bond-or-not-to-bond-th... 
In that case the owner decided to require that the contractor be bondable rather than requiring a bond. 

That's a valid point.
The partition would be more of a temporary measure, once the back yard is developed the whole property should go into a condominium. 
Also as you say whether the construction loan is possible this way I'm not too sure.

Looking for advice from experienced legal minds here 
We own a multi-family zoned lot which we originally bought intending to add a couple units in the back.
Lacking the capital and building experience to develop it ourselves, we want to offer the backyard as a "Developer Special" on the MLS.
We’d rather not risk demolishing our home at the front of the lot. It might not even be worth it at this time. We’d rather not even put it up as collateral on the construction loan.

So far I have a couple ideas how to separate the back yard for sale.
* A “voluntary partition” where buyer and seller agree that each one has exclusive rights to a part of the property. According to https://partition.uslegal.com/voluntary-partitionhttps://par...
“The co-owners may effect voluntary partition in any manner they agree upon. … Usually, a voluntary partition is effected by mutual conveyance or release executed by all owners. A written agreement is valid and need not be formalized by a deed.”
* Some kind of joint venture or common interest development. This could also be a vehicle for other investors to take a share of equity.
* One party owns the entire property and the other has a long leasehold.

(I'm told the lot can't be subdivided because the rear parcel would would need a street frontage, rather than alley access. The new California laws on backyard development, SB9 and AB1033, apply to single family zones and ADUs, not apartments in a multifamily zone. A partition agreement might allow mutual access easements to avoid the appearance of a subdivision.)

I liked this piece on Land Equity
https://www.adventuresincre.com/land-equity-development-stra...
"One important thing to keep in mind here is that this landowner doesn't care about fancy return measurement metrics such as IRR or CAGR. Instead, they simply want a certain multiple over the current price of their asset. Preferably double or more. Period...
No “one size fits all” rules here!
How do the parties perceive the risk-return trade-off in the deal?
Answer to this is what will lead to reaching a middle ground with terms and conditions that make sense to both the sides.
The fun part of such capital stacking strategies is that it allows you room for creative thinking. Only after you as a deal maker are clear on the structure, does your army of experts, viz., your legal counsel, accountants, tax experts, etc. arrive at your thought party — to think through the doability and executions.”

Quote from @Andrew Erickson:

@Dan H., is this too small? Do you think we should structure it differently? Maybe just have 2 or 3 bigger investors come in and do a JV? I'd love to hear from your experience.

We are trying to do a few of these backyard conversions this year. We are planning on doing 4 deals about this same size. So this one deal might not be huge, but we have more in the pipeline. 

 Hi Andrew,
We've been wanting to develop our backyard for some time, and are looking for partners to supply the gap funding on a construction loan. Is this something you and your partners could be interested in? 
The lot is zoned multi family RM 2 5, so you could add 4 large units and 2 or 3 ADUs by rights. With a few affordable units to get the density bonus, we're in Complete Communities Tier 2 with a FAR of 8.0, so you could go up multiple stories. 

To everyone who posted here, in particular https://www.biggerpockets.com/users/jlh, https://www.biggerpockets.com/users/dariuso2, https://www.biggerpockets.com/users/robellis

In our case we only own the land, we don't have the funds to invest, so we need a developer or investor to line up the construction loan and gap funding. We contribute our land equity for at least 30% of the finished project. What structure can you recommend that is fair and low-risk for all concerned?

@Kenneth Bell wrote, “You would be better off if you have the resources to get your own construction loan.”

Yes, that was the big if for us. I wanted to develop our property that way and keep all the equity, but our capital and experience were not enough to get a CL.

So plan B is to give the project to a developer, with our property as land equity in exchange for 30% of the finished project. The developer to be responsible for all construction costs, financing, permits, plans etc.

I'm very interested in your advice on how to structure this to protect our interests. Should we try to retain title until the project is finished, should there be a JV, an LLC, and so on.
Grateful for all the professional expertise here of members like @Jay Hinrich, @Darius Ogloza, @Robert Ellis and the rest!

Ideally we would not encumber or transfer the land into the common interest development until the project is complete – if the lender agrees. I’d also want the builder to post a performance surety bond.

The 30% could vary depending on how many stories the developer wants to go up, or on even finding a trustworthy developer who's interested in a smaller project in a medium-priced neighborhood. I am thinking of posting the property for sale on the MLS as a "Developer special" to see what the response is.

Specifically, it's a backyard infill project in San Diego Mid-City. The lot is zoned multifamily RM-2-5, for 5 units and 2 or 3 ADU's. A much larger floor area is possible by obtaining a density bonus for including a few affordable rental units.

LOoks like Zillow itself has Rooms as a new type.

Good thread over here https://www.biggerpockets.com/forums/922/topics/1104002-hous...