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 asset management 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.

Thanks all! 

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Comments (40)

Jan 17, 2022 - 8:06pm
FlashyKaptain, what's your opinion? Comment below:

As a follow-up - I'm thinking one other option would be to do a simple cash flow split. Agreed % to the land owner and / or investors with the the remainder going to us. Would have to think of what those splits are.

I say this because ideally this will be a long-term hold, so having a preferred share accrue a x% return may kill us if the first few years don't go as planned. 

  • 1
Jan 17, 2022 - 10:27pm
Ozymandia, what's your opinion? Comment below:

Generally in your position I think Option 2 is the best, but it really depends on the Seller.  If he wants to take his money and move on, you may be out of luck.

Moreover, why is he doing this with you?  All you're offering him is the "opportunity" to sell you his land at fair market value and then participate as an LP.  So not only is he not getting paid up front, he's actually out of pocket even more, on a risky new development being done by fairly inexperienced developers.  With no offense meant, that sounds like a shit deal.  If I'm understanding your Option 3 correctly, you want a 25 over a 7, which is pretty darn generous, especially when you have no skin in the game.

If I were the owner of this land, I'd be asking for half the ups or something similar in return for the land and an equity investment (which generates its own return, of course).  My advice to you is to figure out what the landlord wants and craft a proposal around that, not around what you think sounds like a good deal.  Not saying that is your approach.... but this guy is neither a novice (so he knows the value of the upside you are looking for) but also doesn't want the hassle of doing it himself.  As a complete stranger on the internet, that sounds to me like someone who is risk-averse enough to want some kind of payment now to protect downside, but also unwilling to wake up in 5 years and realize the deal he sold you is now a home run.

Maybe take him out at his basis and offer a large piece of the back end for both his equity and the sweetheart deal on the land?  Keeping land costs down will also help lever up the construction loan.  Make him a partner and not a counterparty and you might get better results.

Jan 18, 2022 - 10:55am
FlashyKaptain, what's your opinion? Comment below:

Thanks for this - and agree on better understanding the land owner's motivations. My partner had a preliminary discussion with him and he's open to talking but at this stage I don't know what his objectives are. Just trying to play out the different scenarios in advance of time, but fully agree we need to treat him as more of a partner vs. counterparty.

Long shot in any case but fun to go through the mental exercise at least. 

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Most Helpful
Jan 18, 2022 - 10:41am
itstangible, what's your opinion? Comment below:

Respectfully, right off the bat your pro forma is thin. Your effective value creation is $3.7M and you've only included core & shell costs in your budget. You're missing a ton of costs... permitting costs (probably around $100k), architectural and MEP drawings (~$8-10/sf so figure $1.2M), engineering docs (~$100K-$200K), ID costs (~$1-$2/sf so figure $150K), predev site work e.g. mass grading, cut/fill, bringing utilities to site (no idea on site condition so a guess would be useless), finish sitework e.g. paving, landscape, hardscape, etc., carry costs e.g. tax carry & interest carry, legal costs (could vary dramatically depending on complexity & market), permit fees, tap fees, municipal money grabs (read: extortion). You're a few million short with an already thin development spread.

I'm not sure what fully permitted & entitled MF land goes for in your market but if you'd be wise to consider working as a fee based development partner, gaining all permits and entitlements, and then selling the land to a true MF developer and getting a deferred fee paid at closing. If you can flip the permitted land for $40K/unit then you just achieved your pro forma gross value creation and development proceeds without so much as risking a couple hundred grand.

Jan 18, 2022 - 10:52am
FlashyKaptain, what's your opinion? Comment below:

Thanks man - this is exactly what I'm looking for.

I like the alternative strategy you proposed. Could be a win-win-win for current land owner, us and subsequent developer.

I'm being fully realistic that this is a large scale project for which we're out of our depth at this point. However, I do think there is value to be extracted here somehow, and the approach you describe may be the highest upside / lowest risk for us to try to do.

Mind if I DM with a couple questions?

  • 2
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Feb 18, 2022 - 4:46pm
Atruegentlemen, what's your opinion? Comment below:

I had some additional questions for you:

  • How would you get this capitalized? 
  • Do you have a track record?
  • DO you have a budget from reputable GC?  I would look to get a GMP.
  • Are you thinking merchant build, or long term?  In a situation like this you would want to hold long term so you can crystallize.
Jan 19, 2022 - 2:58pm
AM Guru, what's your opinion? Comment below:

Agree for the most part. Doing this you (or the land owner) will still need to front a substantial amount of capital in order to get the full set of construction docs needed to get a building permit. Honestly, at that point most of the risk for the development has been mitigated or addressed. You spend the vast majority of your soft costs just getting to that point, why walk away then. If they have the chops to make it that far why not take down a construction loan and go all the way?

For the OP though, my .02 is if you don't have the cash or are unwilling to risk your own money in pre development costs, you have no business pressuring someone else to take that risk. Best of luck.

Feb 18, 2022 - 4:40pm
Atruegentlemen, what's your opinion? Comment below:

I 2nd this point.  I would look at the time it takes to entitled and permit land where you are.  The last thing the owner is going to want to do, and of course depending on his motivation, take on entitlement risk and not to mention spend the money, time, resources to take it through entitlements if there really isnt much of a land lift here.  I would spend the time tightening your budget first and understanding what land is truly worth.  Also, is this a by right zoning?  How did you get to you 120 units?

Jan 18, 2022 - 12:13pm
Fred Fredburger, what's your opinion? Comment below:

Not to discourage you or sound like an asshole, but if I were in your shoes, I would stay the fuck away from this. With a TPC of ~$24mm and a stabilized value of $27.5mm, your margin of safety/profit is only $3.5mm… that's only 15% of your TPC and this isn't even including cost of sale if you were to hypothetically sell…if your cost increases by 10%, which in development/construction is frankly not a lot, you barely make anything and tbh might not even break even. For simplicity sake, let's say you complete the project and are fully drawn down on your ~$20mm loan (85% LTC). Your monthly interest payments are $67,000/month at 4% interest rate…a 6 month delay in lease-up is $400k more in costs…that's ~10% of your profit margin…a 1 year delay is $800k…20% of your profit margin gone just like that and this is delays on lease-up…I guarantee you there will be delays during construction and cost over runs. And this isn't even including the profit splits with your partner and land owner. In the best case scenario that everything goes right and you profit your $3.7mm after splitting 50% with the owner and 50% with your partner, that leaves you with ~$900k across ~3 years..that's $300k a year. You could make well over that working a job without the risk of filing for bankruptcy. If the value of the land is only $1.2mm but you can build 120 units, this tells me that land in your market is quite frankly not very valuable which occurs when there's not much demand for it or there's a lot of supply. This means that there isn't enough demand for rental or condos, which means you can expect high vacancy and longer lease-up periods and may need to give a lot of concessions. In my market, developers are making $7mm-$10mm on a ~$10mm-$12mm TPC development. I know a developer building ~70 units ~$45mm TPC and conservatively he will profit $18mm-$23mm. I understand that you want to make a name for yourself and develop a mid/high rise, but you can't get so lost in the dream that you can't recognize a dog shit deal that has a much higher chance of leaving you much worse off. Sometimes there is land that is just not worth being developed. I've seen developers do this in low income areas in my market. They entitle huge developments in the rougher parts of the city that have not yet gentrified yet and they try to sell the land to a developer to construct…but the truth is that my construction cost would be more than the value of the completed project…I've even underwritten these deals where I got the land for free…and I still wouldn't do it

[EDIT] sorry the project will take you 2-3 years to construct and probably 2 years to stabilize, so total project timeline is 4-5 years. At $900k, that's $180k-$225/year

Jan 18, 2022 - 1:25pm
FlashyKaptain, what's your opinion? Comment below:

This is why I come on here, great context - thanks for the detailed response.

  • 1
Jan 18, 2022 - 1:34pm
FlashyKaptain, what's your opinion? Comment below:

And as an additional point - I've heard from multiple sources (and been my and my partner's experience as well for the few properties we hold) that vacancy rates are in the <2.0% in our market currently. Expected pop. growth of 2.0%+ / year over next few years. We are in a market where apartment supply is quite low.

All that to say that I'm not super concerned for vacancies - but perhaps points to a bigger issue with this piece of land if it's been sitting on the market for a while, given market conditions.

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Jan 18, 2022 - 1:55pm
Fred Fredburger, what's your opinion? Comment below:

The tough part about being a first mover is that you are heavily dependent on gentrification. You can buy the land for cheap, but rents/sale prices aren't there yet. Alternatively if you wait until gentrification, then land prices become too expensive. The best time to invest is during the small window between the 2 where the market is gentrifying but land values are still reasonable. Unfortunately, I still think you are way too early on this market. But this is besides the point. The greatest red flag is your margin of safety of only $3.7mm on a $24mm project. Cost overruns and other delays is almost guaranteed. But even if everything goes smoothly, your upside is just way too low to justify this level of investment and work. I don't really use equity multiples or IRR, but if the equity investment is $3.4mm and your profit is $3.7mm, that's a 2x multiple. Isn't that really low for a development? What would your cash on cash and IRR be? I imagine you have a pretty low cash on cash and most of your IRR is based on your exit if you are projecting aggressive rent increases and cap rate compression. I only do deals where I am happy with the profit/returns based on today's rents/sales prices (at most i'll proforma rent/sale price increases by 1-2 years), but for your deal it doesn't seem like the deal really works until 5-10 years down the road when rents/sale prices are meaningfully higher. To gamble your entire project based on what the market will be 5-10 years down the road is very risky. If your profit margin was in the $7mm-10mm range today, then I would consider it, but at ~$3.7mm, your margin of safety can disappear very quickly and easily

Jan 18, 2022 - 10:21pm
yayaa, what's your opinion? Comment below:

Great insight man. Interesting.

Quick q - How are developers making 20m on TPC of 24m? Interested to hear an in depth write up of that. Thanks!

Jan 18, 2022 - 11:00pm
Fred Fredburger, what's your opinion? Comment below:

Basically he was able to acquire the land for very cheap in this market. The market the property is in is not an "up and coming market" or one that needs to already is gentrified. The land was previously being used as a synagogue. The developer reached out to the owners directly to partner with them and ultimately their agreement resulted in the developer paying them $4.25mm and agreeing to build a new 10,000 SF synagogue for them. Oh I just double checked and i messed up the figures. So the TPC is ~$42mm-$47mm. The project is for 70 units (9 affordable) and 100,000 SF including the Synagogue. If you net out the 10,000 SF Synagogue then that's 90,000 GSF with underground parking. Let's use very high level figures because I'm not building a model. ~$350-$400/SF hard cost, let's say $1mm soft cost, $2mm cost of carry @ 5% interest rate for ~3 years and 80% sellable SF (80% x 90,000 = 72,000 SF), and 4% cost of sale. This market currently sells at ~$900/SF for luxury the time this thing is complete it'll prob be close to $1000/SF. Let's assume that the average affordable unit is 800 SF (there's 9, so 7200SF) and basically sells at cost ($400/SF). Based on $400/SF hard cost, I arrive at ~$18mm profit and ~$23mm at $350/SF hard cost. I can look at the actual plans (they are public) to see the actual sellable SF (20% common area seems a bit high and a good architect should be able to bring that down to 15%-18%), but I'm lazy. No matter how you sensitize this project...the guy is making a fuck ton and I hate his success

Feb 4, 2022 - 12:51pm
Ozymandia, what's your opinion? Comment below:

Worth noting that this TDC probably includes developer fee, so he's getting paid more than you're noting.

And lets be honest - he's not putting any equity in, it sounds like, which means not a lot of downside risk if the market does shift.  And if he has no equity, then his guarantees are meaningless, so that's not an issue either.

This is basically the Michael Stern model.  Make up some exit numbers, take your fees, and hope for a home run.

Jan 18, 2022 - 1:35pm
KClubs, what's your opinion? Comment below:

Generally agree with itstangible

Step 1 I'd try to figure out the vendor's intentions and/or desires. Does he just want to get out? Does he want a lump sum cash payout? Is he open to being an investor (silent or otherwise)? Etc. 

Step 2 I'd consider your sources of capital, debt and equity. Sounds like you've never sourced equity, so if the vendor isn't interested, you'd need to sort out asap. On the debt front, I would recommend considering both acquisition financing for the land itself (hopefully interest only), and construction financing (once you break ground).

I would strongly consider looking at not just profit on cost, but income on cost as well. This is a key metric for investors looking at stabilized cashflow, both debt and equity

Jan 18, 2022 - 2:11pm
Fred Fredburger, what's your opinion? Comment below:

I agree income on cost/cash on cash is very important, but doesn't it move in lock step with profit to a certain extent? I don't think it makes sense that a project generates a low EM/profit margin, but then a very high cash on cash return...that would mean there is a very wide spread between sale prices and rental prices. I can understand if the market OP is in is better for rental than condos, but with a $3.7mm value creation...i find it hard to believe that a rental strategy is meaningfully better than a condo sell outs. I don't even know if OP would hit a 1.20x DSCR upon stabilization, but I could be wrong because I am not modeling this.

Jan 18, 2022 - 2:19pm
KClubs, what's your opinion? Comment below:

Yes to an extent but it helps substantiate/justify the cap rate assumption/projection

OP mentioned market rents, so I'm assuming its rental

On rental v condo: some folks want to get out of the project (condo) & some folks want the cashflow (rental). Better/worse can encapsulate more than just one number being bigger than another

Jan 18, 2022 - 3:49pm
Fred Fredburger, what's your opinion? Comment below:

But that's the thing about cap rate and rent increases, you can justify, substantiate, and proforma all you want, but at the end of the day there either is or isn't a buyer at the asking price. I know that OP wants to rent these units, but the reason I'm so focused on his profit margin/value creation of $3.7mm is because it tells you a lot about the assumptions and metrics of the project. $3.7mm on a $24mm development is very low, which means there's not a lot of demand for the value OP created. OP can project very high rent increases in order to show high CoC on paper, but if the spread between OP's TPC and stabilized value is only 15% ($3.7mm/$23.8mm), then that means his cap rate is very high which tells me a lot about the market ie not a very desirable market which then makes me question can he really increase rents that quickly and are vacancies really that low? If rent growth was really that high and vacancies that low and investors/developers felt very confident in these figures, then capital would flood the market, rapidly compressing cap rates, but If OP is aggressively projecting rents/vacancy then that means his cap rate must be high in order to impute a stabilized value so close to his cost. Also, the fact that the value of the land is only $10,000/developable unit means that land is not very valuable and therefore cap rates are high. Alternatively if OP is projecting conservative rent growth/vacancy, then his cap rate must be low, but if his cap rate is low, then his CoC/income will be low on paper in which case OP should do a condo sellout, but if OP is arriving at a sellout value that is only ~15% from his cost, then this project isn't worth doing as a sell out either. I understand that a condo sellout may yield slightly higher profit margins than selling the entire apartment and OP's $27.5mm stabilized value is based on the entire apartment, but the condo sellout isn't going to be far off from the stabilized value or else someone would just buy at the stabilized price and condo it 

[EDIT] If OP's cap rate is low, but stabilized value is so close to his cost, then another reason for that is that his construction cost is very high, but I do not think this is the case because he is projecting $175k/unit. In my market construction cost is about ~$300k-$400k/unit

Jan 18, 2022 - 10:25pm
yayaa, what's your opinion? Comment below:

How do developers know if condos are feasible for a site when it seems like every developer strictly just models apartments and not for sale condos?

Jan 19, 2022 - 10:45am
KClubs, what's your opinion? Comment below:

It really depends on the developer and capital partner. Some prefer one product over another.

Some developers will build something and sell it once stabilized, others will refinance the construction loan and move it into their asset mgmt work. Sometimes these decisions are led by the developer itself, other times by the capital partner. 

Jan 19, 2022 - 10:56am
CRESF, what's your opinion? Comment below:

Same that you would do for apartments - figure out what it would cost to build the condos, what they would sell for, and how you can finance it. The reason people are mainly building apartments is that with where cap rates are, so long as your development spread is 150bps or so, you're just going to make more doing apartments unless the profit margin on condos is 30%+. Plus apartments are much, much easier to finance (both debt and equity). I think you're going to start seeing condo development coming back as land costs continue to rise and multi gets harder and harder to pencil. But last decade or so, if you could build apartments for a mid-6% ROC and sell it for a cap rate in the 4%'s, you'd be crazy to develop condos. That's why you've primarily only seen significant condo development in areas with very high land costs. 

  • 1
Jan 18, 2022 - 4:00pm
CRESF, what's your opinion? Comment below:

Some really great answers on here already, so I'll try to add a new thought in here as well...85% LTC construction loan, that's generally available from local lenders for A++ developers. I would assume that's not going to be there for you, but I could be wrong. Second point is who's providing net worth and liquidity guarantees for the recourse? I'm guessing neither you nor your partner have $20M+ net worths, so the lenders going to want to see someone that does. I'm not sure what the going-rate is today for a sugar daddy to come in to provide a balance sheet, but a few years ago it was about 20% of the promote. That's another cost to factor in.

Agreed with others that your numbers aren't there. So either you find a way to net down your costs with TIF money (not sure if this is even possible in your market) or something similar. Land basis is cheap at $10K/unit, which tells me the market rents right now don't make sense for new construction. 

Keep'll hit on something that works - either on this site or somewhere else. 

  • 2
Jan 18, 2022 - 4:26pm
FlashyKaptain, what's your opinion? Comment below:

Great comments all around, super appreciated!  You guys are evidently way ahead of the curve vs. where I am now and the numbers I'm working off of currently are too high level for this type of project / $ values involved.

We'll keep working and try to get info from our contacts who would have perspective on this property. We're also fortunate to have two close friends who are project leaders at one of the largest GC shops in the region and could give us much more accurate cost estimates.

Appreciate everyone's input and I'll likely DM a few of you this evening.

What an unbelievable resource this forum is.


  • 3
Jan 18, 2022 - 4:36pm
Fred Fredburger, what's your opinion? Comment below:

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