Multi-Fam - Creative Deal Structure with no Equity
Looking for some creative deal structures / ideas around this:
My partner and I have a line on a well-located piece of land prime for multi-res development. The land was acquired by its current owner 5-6 years ago with the intention of developing office space. City council turned down his project and wants the land to be used for residential development.
The land owner is from out of market, doesn't know the seen well and is out of his element in multi-res development (plus has no real appetite to manage it - older guy).
My partner and I are young guys - I have a finance background (IB + MM advisory) and some real estate (bought and manage one property, in the process of developing a 25 unit property currently), and my partner has a real estate background (hands-on contractor, acquisition, prop. management, etc.). We are both well networked in our region. Note that neither of us have raised external capital before.
My partner has met with the land owner and he is interested in hearing us out. We are at the VERY early stages, so actual plan / numbers are high level and will get refined if the land owner is receptive.
My partner and I are drafting a proposal for him and I'm looking for input on approach, potential structure. Feel free to destroy the plan as well if there's obvious flaws you see.
Some high level numbers (note that we're VERY early stages - this will of course get refined:
- Land - worth ~$1.2M per the current owner.
- Zoned for a 120 unit development.
- In our market, that's ~$175k / unit + ~7.5% contingencies = $22.6M development cost (before land).
- Total cost of $23.8M with land
- With current market rents, vacancies at 3.5% (1.0% higher than market) and a conservative cap rate, the stabilized project is likely worth ~$27.5M
My question to you - how would you frame a proposal for the land owner?
Option 1 - land owner pledges the land to the project upfront, we pay him his asking price + interest once we refinance the construction mortgage. We need outside investors for this to work.
Option 2 - land owner contributes all initial equity (at a 85% LTC, equity requirement is $3.4M so $2.2M shortfall after considering the $1.2M land). Land owner is in the project all-in for $3.4M. We pay him his land value of $1.2M when we refinance, he keeps the rest as a pref in the project + upside (TBD what this would be)
Option 3 - land owner contributes all initial equity, we structure it at the start as a pref with promote (he's the LP we're the GP). We give him 7% + 75% or something similar.
Land owner doesn't lift a finger. We manage (as we should):
- Pre-development phase (legal setup, zoning, approvals, financing, site plan, architectural plans, work required on land, etc.)
- Construction - we manage the GC (who we know well and has experience in big projects) + bank
- We manage the lease-up period
- We then hire-out prop. management company once leased up. and my partner and I continue doing thereafter
I am in a bit of a rush as I write this, so apologies if unclear, but I'd be curious to know if any have experienced similar situations and found creative ways to deal with it. Note that this owner has sat on this land for a while so he may be more flexible to accommodate "creative" solutions as otherwise.
Bonus - for those who contribute good content, I'll be happy to share project updates / numbers on our other projects and on this one - if it sees the light of day.