Ground lease to millions

I've got a client who just made a killing off of a new construction deal with a ground lease. The guy entered into a ground lease and spent $2.6 million to build new Class A retail space (9,000 sqft) on a highly trafficked road. The value of the stabilized leases was appraised at $5.3 million. Project took 28 months. The guy's investment was $520,000 (80% loan to cost), and then he cashed out $400,000 at settlement of the permanent loan. The construction loan even financed his interest carry cost during construction! FML.

Guy has created $2.7 million in gross value with $120,000 skin in the game in 28 months. Makes me sick. Also makes me want to "figure out" how to do this myself. I've made maybe $600,000 or so on 5 residential builds over 4 years now, but this guy just puts me to shame. >:l

 
SHB:

Also I think you may mean 80% loan to cost, otherwise his initial investment would be ~2 million.

Prospie, his initial capital outlay seems to have been 520K during construction and once he got stabalized financing, cashed out an additional 400K (leaving 120K). Certianly one would say his investment was 520K though and not 120K.

Yeah, meant 80% LTC.

Realistically, the guy's investment was only $120,000 long-term since he plans on holding indefinitely. I would see it as a $520,000 investment if he turned around and sold it. The guy cashed out and was left with $120,000 skin in the game on a property that is worth $5.3 million.

 

Construction loans are typically now financing interest carry. Also given thats its construction I bet the lender asked for a recourse guaranty. If this project didn't go his way, he'd be in serious trouble. So yea he put up money but he took on large risks as well.

Array
 
TeddyTheBear:

Construction loans are typically now financing interest carry. Also given thats its construction I bet the lender asked for a recourse guaranty. If this project didn't go his way, he'd be in serious trouble. So yea he put up money but he took on large risks as well.

Recourse is limited to standard carve-outs, which means he has no personal guaranty. His personal guaranty went away at property stabilization.

 

"Realisticly" his investment is 520K, his loss was potentially 520K during construction/lease up which is the riskiest part of the whole proccess. You measure investment as potential for loss.

I also have a hard time believing he didn't have at least a partially recourse loan on a spec construction loan. His stabalised financing im sure is non recourse subject to carve outs but theres no way you're getting a spec construction loan at 80% LTC non recourse.

But anyways, where did he do a spec retail building?

 
Best Response
SHB:

"Realisticly" his investment is 520K, his loss was potentially 520K during construction/lease up which is the riskiest part of the whole proccess. You measure investment as potential for loss.

I also have a hard time believing he didn't have at least a partially recourse loan on a spec construction loan. His stabalised financing im sure is non recourse subject to carve outs but theres no way you're getting a spec construction loan at 80% LTC non recourse.

But anyways, where did he do a spec retail building?

If a guarantor issues a 100% unlimited and unconditional guaranty of a loan amount then his risk to loss is the entire loan amount + down payment, which in this case would have been the $2.6 million during construction. By your logic then, this guy's "investment" would have been $2.6 million under a recourse deal. On a 10-year term loan with 25-year amortization with cash out at the end, I'd say the guy's real skin in the game is $120,000. That's all he has in it currently. You can interpret that however you want, but there's a reason why the guy negotiated the cash out at settlement--because he realized he would only have $120,000 of skin in the game for the remainder of the loan term (10-25 years)...

I did say that his personal guaranty went away at property stabilization, so he has a long-term deal with no recourse even with only $120,000 left in the entire deal.

 
SHB:

Its his initial equity investment...520K no getting around it. He reduced his equity exposure upon stabilization but he still neded that 520K which could have disappeared.

He doesn't have that skin in the game anymore though--that's the point. He has a $5.3 million asset with $120,000 currently invested into it. You're really just splitting hairs here.

 

Yea its a good deal, but honestly nothing people haven't seen before. Most banks require a guaranty, so I am sure his personal financials show he is reputable. This guy probably isn't a nobody. Hell I seen a developer who only put $200k in equity in a project, create a property worth of $30 million. He basically guaranteed the loan, but brought in preferred equity.

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