When to engage capital for programmatic partnership?
Could use some advice here.
Have been in the development space for some time, although went off on my own a little over a year ago. I have been in talks with city officials about a pretty unique development program I am working on launching that would enable some serious scale. Right now the program for this city would encompass at least 1,000 units over a number of smaller, 50-75 unit projects scattered around. It is early, but sounds promising, so want to start putting together the right team as that can take time.
As what we are looking for is not by right, we would have to either purchase the land up front or gain control of it with a longer escrow as we would only be able to apply for these specific variances if we have site control. There is an element of entitlement risk but we would be fairly far along with the city and have an understanding of whether we can get them or not likely before any money goes hard. There will be downside cash flow protection for most sites, but it will be minimal (4-5% caps) so would really be a land bank if it fails. Untrended YOC is a true 6.5%-7%.
Beyond this one city I am talking to, I would like to propose the same program to a couple other cities that I think it would be relevant for. I think these conversations have been a good proof of concept, although early.
I am trying to figure out the right steps:
As these entitlements/variances/city introductions can take years, and I cannot survive on my own forever, would this be the right fit for an OpCo investor?
Are there LP's who do programmatic deals that involve entitlement risk, or should I focus on family offices/CoGp's to get the land paid for, and worry about the LP equity for the construction later? It could be upwards of $100M+ for land which would not be a small check for most CoGP's/FO's and I will need someone to help on the guarantee's regardless. We would have to execute on the entire program concurrently (not phased) due to the way the variances have to be processed.
Any thoughts on best steps would be appreciated!
Based on the most helpful WSO content, here’s how you might approach your situation:
Engaging Capital for Programmatic Partnerships:
Structuring the Capital Stack:
Timing and Strategy:
Key Considerations:
In summary, focus on securing family office or Co-GP capital for the land acquisition phase while positioning yourself for LP equity during the construction phase. Build a strong team and leverage your initial city discussions as a proof of concept to attract the right partners.
Sources: Q&A:New Real Estate Development Shop, Life at Mega Developers, Life as a Real Estate Operating Partner - 4 Observations, How do I know I have what it takes to start my own development shop?, Lunch & Learn -Ins and Outs of Construction
Scatter-site multi, presumably in a top 15 metro, requires a certain type of investor whose interest in the deal will be complicated by the lack of track record at a small shop, especially for a lot of developments since they can't be phased. There is always capital for things if they're screaming deals but this particular project has a lot of operational complexity and would almost certainly be easier to stomach if you co-GP'd. No doubt there are programmatic development JVs but usually with established shops and/or existing relationships.
I'd definitely go about this by splitting it up into 2 stages as you mentioned:
Have the first stage be essentially land development, funded by smaller FO money, where you entitle and get utilities, etc. Plan to for these investors taken out at a predefined return where the deals still pencil for land cost, probably through a bridge/pref-equity type structure, because you need to cap their return to make it still appealing to the second group. Almost like bridge equity in a LIHTC deal before the tax credit equity takes them out.
For the second stage, you can ideally start trying to line up the larger investor from the beginning because you take the entitlement risk out of the question. It would be easier to sell if you were to partner with another, more sizable developer because 15-20 simultaneous deals will not be easy to manage (or to convince you can at least) and they probably have capital relationships that make this step easier. A strength for sure is that you come out of the development with enough scale straightaway to manage more intensive scatter-site.
Thanks. All great points and I agree, I think it is definitely a two pronged approach and good call on the more established CoGP. Not able to handle this scale on my own off the bat.
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