I have a question as to how to structure a development deal. I will simplify the situation for clarity.

There are a group of 10 potential investors that are considering buying a 10,000 sq foot loft style building together. The building costs $130 a square foot ($1.3MM) and the construction will cost $100 a square foor ($1MM). The total project will cost roughly $250 a square foot ($2.5MM). Each investor would like to buy a 1,000 square foot loft for $250,000. Construction will take 9 months. Each investor can put $50,000 down, and can get approved for their mortgage.

What we hope to do is create an LLC with 10,000 shares in it and sell them for $50 each. Then this LLC will have $500,000 in cash and will apply for a construction loan. We are not sure if it would be possible to get this loan or if a single investor would need to back it. Upon completion of the loan each investor would be allowed to receive their investment back and would take that money and use it as a downpayment on their mortgage and the mortgages would pay off the construction loan.

Please let me know what I must consider on such a project. Any advice will be greatly appreciated.

Thanks,
TL

This idea I like, it shows an innovative way that a group of people can get together and make something happen. Off the top of my head you want the following:

1- As much detail on the improvements as possible. The plans and permits do not have to be prepared or pulled at this stage, but a construction budget and the zoning feasibility should be taken care of.

2- While lenders require unlimited guarantees, they might let you structure this with limited guarantees so that each of the investors is somewhat protected. When I have done loans for professional associations, I have been able to get around the unlimited guarantees by structuring limited guarantees that amount to 125% of the loan amount as a mitigant. That is, on a $1MM loan with ten partners each partner is on the hook for $125,000. On the other hand, if you are the lender push for unlimited

3- A general contractor who must include details on his work experience must prepare that construction budget.

4- The problem that I see with the plan of letting each investor take the $50,000 out as they close on their units is that normally the developer doe not get his money until he sells the last few units. Guess what, the bank likes to get paid first! It usually works out that the bank releases each unit at approximately 90% of sales price. This means that on a best-case scenario, the LLC will not see any real money until the 9th unit closes and all of the $250,000 for the 10th unit will go to the LLC.

5- A small bank will be interested in this as you can use the incentive of offering something like a “right of first refusal” to fund the mortgage loans.

6- The way that money is released means that each of the investors must provide additional money at the closing for each of the units. Being that these will be regular residential mortgages means that the percentage should be low. They can always use the distributions from the LLC to bring down the principal.

7- The appraisal must show an “as is” value, an “as completed” value, and the value of each unit.

That is it for now. Remember that this is just one way to approach the deal. It could very well be that you can convince a lender to go for your original plan, but that would mean that the accelerated payment {which is normal for constructions} would have to be overlooked.

Good luck

In response to point 4. If the same bank provides the construction loan as the mortgages, which is how I envision this deal happening, then I hope that they would be able to instantaniously swap the construction loan for the mortgages, taking the downpayment for the mortgages out of what had been put as the downpayment on the construction loan. Worse case, each investor would need an additional 5-10% down to get the mortgage, but once his mortgage went into effect he would receive his 20% back.

In response to point 2. From what I understand is that the best case scenario is that each investor would put up their $50k, and would be liable for up to an additional $200k. Or, possibly, one of the investors who could get the loan on his own could take the full liabilty.

Does anyone know what sort of offering plan would be required? I have read a little about "Tennants In Common" and thought that the deal could be structured so that we would be TIC and then once people have moved in, then the building could be converted to Condos. Any thoughts on this?

Also, this will be my first real estate project, and it will be primarily with close friends and family who will be looking to live in the building. We are not looking to turn a profit, simply each get good deals on apartments. What this means is that the investor purchase price of the units will be far below market value. I would think that this will make getting the mortgages easier.

Do you have any recommendations on small banks in the New York City area that might be interested?


Your previous post was incredibly helpful.

Thanks,
TL

” …..Worse case, each investor would need an additional 5-10% down to get the mortgage, but once his mortgage went into effect he would receive his 20% back.” Not so much when his mortgage went into effect, but when the last unit is closed. If the LLC is acting as a developer then it is going to take its money just like a developer does, which is last.

” ….. In response to point 2. From what I understand is that the best case scenario is that each investor would put up their $50k, and would be liable for up to an additional $200k. Or, possibly, one of the investors who could get the loan on his own could take the full liabilty.” You understand correctly, and yes an individual that is financially strong could act as the sole investor, but why would this strong investor stick his neck out when there is no profit?

” …..Does anyone know what sort of offering plan would be required? I have read a little about "Tennants In Common" and thought that the deal could be structured so that we would be TIC and then once people have moved in, then the building could be converted to Condos. Any thoughts on this?.” Yes, consult an attorney

” …..Do you have any recommendations on small banks in the New York City area that might be interested?.” Not really, a few thousand miles away. {I do love to visit and have been there a couple of times} But going back to your question… No and even if you were in my backyard, I would not recommend a lender

Thanks for your help.

I am planning on using an experienced real-estate / co-op attorney but before I get involved with an attorney I am trying to understand what my options are so I can have productive conversations with the him from day one. I always think that you should try to understand all of the options yourself before meeting with anyone, so the meetings are more discussions of the options rather than explanations of the options.

There do not appear to be many online resources for discussing real estate law, at least not that I have found.

And please let me rephrase my question about small banks in NYC, do you have any recommendations as to how I should go about finding a bank that might be intereted?

Thanks again,
TL

Shop this idea around, just start making some phone calls. Dont jump at the first one who will take you seriously.

The reason there isnt that much info about real estate law is because there 50+ different sets of laws (each state has its own) so nothing is too authoritative. Your idea also involves some corporate/partnership law which is the side of it you are talking about when all of you get together and put in money, then get money out. Best bet, go talk to the attorney and lay it all out like you just did above, they can pick out the details that are needed to have a converstation with you about options. (ie, LLCs dont issue stock, they have members more like a partnership) Some states have good corporate entities geared for this kind of specific activity.