Looking at a development project (apartments over ground floor retail) with a total cost of $30MM (land would cost $10MM at closing).
Based on the proforma exit value of $38MM, the returns are on a the thin side. There is an option to sell a condo interest to one of the retailers who is interested in the site. Rather than lease it, we could sell them the condo interest and have them pro rata fund their portion of the construction costs for their box and parking.
As it relates to construction financing, assuming 60% on total costs, we were looking at $18MM of debt against $12MM of equity. Under the retail condo scenario, the retailer would pay us $4MM for the land plus their portion of costs for building plus costs for 24 parking spaces.
When we restack the capital, I am curious if, from the lenders POV, it would still look like $30MM total cost, with $4MM equity contribution from retailers + $8MM from developer, or if they would look at it as $26MM cost (netting out the $4M from retailer), and then size their loan 60% of $26MM.
Ultimately, we are trying to reduce our portion of equity to make the returns look better, and are relying on this retail condo scenario as a way to reduce our equity outlay.
The lender wouldn't net the $4 million contributed from the retailer against the project cost. If a project requires $30 million to build, they're evaluating the capability of the developer to contribute the $12 million in equity to finance the budget, appropriately build the structure, and have demand for the asset at stabilization allowing for an exit value sufficient to cover the loan amount + a healthy margin of safety. If the developer gets $4 million in equity help from this retailer option, great, but ultimately your lender is going to be relying on the developer who signs the loan agreement to contribute the full $12 million if that doesn't happen. The developer is also almost certainly providing some sort of completion guaranty.
You should get your 60% LTC on $30 million if your developer is credit worthy with a good track record and the asset will be marketable at the time of exit. The retailer option is a "nice to have" from a creditors POV, but won't really provide much support to the deal.
I get what you are saying. The retail condo option is helpful in that it reduces our actual equity outlay. Basically we are getting the value for that particular piece upfront vs at the sale in year 4. I was just curious if the lender would allow the developer to treat that sale upfront as equity.
Curious if this development moved forward. My gut reaction is that the land cost as a percentage of the development cost is way too high to make the project work. Seems you would need much greater density in order to compensate for the high land cost. For deals in which I'm involved...a $10MM land price would be part of a deal with a total development cost of $50MM+.
This, land is high high high
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