To all the developers out there. How are you creating value from construction to term loan?
1.Ideally how large is that delta in %? Ex: 2m construction loan and then getting 2.5m in take out
2.what makes for a good deal in development? Everyone talks about YOC but how much equity do you pull out in deals once stabilized? Is getting 60% of your equity great?
3.How often do you pull all of your equity out? Is this rare? What are some things to look at for in your underwriting model that are red flags? Particularly if you're a long term owner and not looking at IRR?
Reduce your exit cap 25 bps
depends on deal but i am learning that 60% is actually good
Got it. So how do you capture all of your equity? Following years in the long run?How are merchant developers making money if they're selling before lease up? The short answer is sell the buildings for more than the combined cost of the land, soft costs, financing costs, and construction costs
When things are frothy you can get a great price by selling before it's leased up
Merchant developers don't typically sell before lease-up, you'd hold the property through stabilization then sell.
Returning 60% of your equity roughly equates to a 1.3X unlevered multiple, assuming 65% leverage on construction and then takeout. That's certainly a good outcome.
Make sense. Thanks for clarifying and giving your input. I believe that to be the case as well. I’m assuming 5 years down the road as rents rise (hopefully that’s the case) the capture equity back. Again you’re ideally making money on NOI as well. Is this correct?
You are correct about all these things. However, most developers do not refi. Most just sell.
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