Does anyone have any experience here developing /underwriting small multi family? Specifically 10 units or less? I am trying to understand the financial analysis of it but can’t quite wrap my head around it.
When doing a small ground up development how does the financing work?
20% down for land, and 75% ltv for the construction loan? After completion I read that you have 20% equity built in (not sure if that’s true). Are small developers building these properties, pulling the equity out, and building the next one?
This isn't the only way to do it, but my friends that do this (some of them tried to include me in the syndicate so I know the structure relatively well) typically get anywhere from 2-10 investors in the partnership, then develop, then slowly start buying out the other partners if the project proves to be profitable. Whether or not it proves to be profitable, they use the remaining CFAD to pay down the loan further, then typically re-fi. It's a little different landscape the last year or two with rising interest rates, though....
Thanks for the response. Couple questions:
How many units are they typically developing?
With the structureship of the syndication what happens if the project goes belly up?
No more than 15-20, usually in the 8-12 range.
Not sure if I'm understanding your second question but I think you mean if there's a 'default' by 'belly up'? If the project goes belly up, it works just like a normal deal with respect to cash in/cash out. Disbursement of cash flows/losses usually pari-passu among ownership stake unless there's an overriding agreement. If you just mean it's a crappy deal and there's carry costs that need to be outlaid, then that is usually PP as well.
Got it. Thanks for the overview.
I was referring to if the project fails with the belly up. For someone that wants to do this eventually where would be the best place to meet, and network with people that are currently doing this? ULI? NAIOP?
ULI and NAIOP will be good places, for sure, but a lot of those professionals are focused on the institutional side. In a lot of cases, the smaller groups are sort of just friends or family that get together to put these small deals together.
Thanks for clarifying. Last questions:
As someone that has plans to do this in the future what would you recommend? Do I just save up and try to complete a project on my own, or would it be better to network and try to partner with a seasoned developer on the first couple deals? My first choice would be to partner for my first few deals, but I don't know where to find, and network with a suitable, experienced developer. It seems like most of the smaller guys don't have websites and don't really advertise what they do.
bump on this...
MonkeyWrench would the partnership/equity buyout be negotiated or discussed beforehand?
I'm curious about starting in the small MF range to get a personal portfolio together and have been just kind of gathering info. there's a builder/developer in my area that funds some of their projects with hard money lending, any comments on the long term feasibility of that vs. a structured equity stake?
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