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Qs about JV to develop apartment on owner's acreage

815 Views | 4 Replies | Last: 2 yr ago by BearJew13
Divining Rod
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So, a client has 10 acres worth about $2MM in city limits with good access to all major highways. A developer wants to serve as his own GC and put up a 300 unit complex of mostly 2-2s and 3-2s Class B complex.
Developers dont have a long track record so owners hesitant to let go of their mostly free and clear parcel.

They believe they can develop this thing much cheaper as they will serve as GC, and there will be a positive delta of several million between construction cost and the permanent financing available.

They are offering client 1) a premium on "sale price", plus 2) some percentage split of the delta (appx 7million) and 3) a percentage of the iwnership of the complex.

I know there are a ton of variables, but what do you think would be a reasonable amount for owner to ask for in each category?

Also, for San Antonio/New Braunfels/San Marcos area, what is the range of construction cost per sq ft (square footage of Class B rental premises -appx 330,000 in this case)?

I think this would be a 3-story complex with no pool,
no garages.



THANK YOU!

Divining Rod
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Another question: owner can sell property and make good profit with minimal risk. He can make a lot more if the developer does what he says he can.

If owner wants to minimize his risk of non-performance or underperformance, what are the best options?

take on additional partners to split the ownership side?
are there any kind of "performance bonds" available to pay off owner a certain amount if the project goes under or fails to meet the financial marks projected (e.g.,costs of development/time/final value/permanent financing available.)?
Casey TableTennis
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AG
Most developers I've worked with have talked/thought in terms of IRR, ROA or MOIC. Sure those translate back to a $Delta, but not enough info given to divine that. Hopefully more experienced folks will be along to provide better info, I just observe you are thinking about it from a different perspective than they likely are.

There should be a number that is a happy medium, but the higher the premium, the lower quality developer you will likely end up with.
Norbert
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AG
You probably should talk to a real estate broker. I am not one, but familiar with this process and costs. Right now I would say for Class B you are looking at around $95-105/SF or $100,000 per unit is a rough cost estimate just for the construction costs. Another $25-50 per SF for design fees, permit fees, impact fees, and other soft costs. But all construction costs are rising rapidly right now so who knows where they will be in 6-12 months.

However, I have seen very experienced apartment developers run into issues in developing projects that require a lot of experience and money to resolve. Everything from utility issues, design, construction costs increases (like right now is killing some deals). Does this group have enough capital/cash to cover a $2-3MM shortfall?

Also, what happens if things go south and there are multiple liens filed on your land? This could tie up the land for sale for years. I would think your better off selling the land right now in this market than risking all this to make more with all these risks and not getting your money out of it for at least 3 years, which at that time could be a much different economy and market. It will take at least 3 years to be completed from now at earliest if they haven't started design already. 18-24 months to build plus another year to design/permit/etc.

Just my two cents.
Divining Rod
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I appreciate that input- thank y'all for weighing in.
BearJew13
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AG
3 story walkup garden product is $125-$130/sf. I'd be concerned with heavy 3-2 unit mixes, they look good in excel math but are typically your biggest liability in lease-up, especially with all of the SFR product coming on line.

The land owner should contribute the land at an agreed upon basis, which should then be credited as LP interest in the partnership. They should receive an accrued preferred return on their equity (market is 8%-%10% compounding annually). Returns to the LP interest should follow a market waterfall structure. Unless the developer is also offering part of their carry or promote to the land owner, I would be suspect if they are showing LP returns above a 20% IRR on a 30 month hold, and a 1.6x-1.7x multiple.

Also, what type of structure is the rest of the LP money getting? Who is the partner? Is it institutional capital, friends and family, HNW? What type of control/decision right will they be allowed? There is likely going to be another $6MM-$16MM in additional equity required on top of the land contribution depending on how the capital stack is structured.

I would be VERY cautious about the developer self-performing as GC on a project this size. What is their bonding capacity? Will they be able to secure construction financing? Is the developer putting any of their own capital into the deal?

Landowner's can do very well contributing their land into a JV. It can unlock greater value than just the market price of the property, and is also much more tax-efficient. Just make sure they have a good COMMERCIAL REAL ESTATE attorney review everything.
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