Development Underwriting - Negative Equity Contribution?
Came across a situation at work today and would be interested to get this subforum's thoughts on it.
Our development group was discussing an opportunity in which we would form a 50/50 JV with a partner that specializes in multifamily. Our firm is contributing equity in form of land, with any remaining required equity contribution to be made in cash. They were running into a scenario in which we would have a negative equity contribution, or, in other words, our JV partner would have to write us a check as the value of the land was in excess of our equity requirement.
Some numbers for the sake of example:
$100M project cost
65% LTV
$35M equity requirement
$17.5M equity requirement at pro rata
land valued at $20M
Stabilized NOI of $7M
As you can see, we would be receiving 50% equity in this new JV plus a $2.5M check in return for the $20M land sale.
How would you show a levered cash-on-cash return here?
At the JV level the land would be considered a project cost. The land portion of your partner’s payment to you for their 50% interest should be treated the same way as you being reimbursed for predev expenses. Your partner would not consider it as a positive cash flow in their final waterfall. However, you would consider it a return on your original land investment, again, separate from the project level returns.
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