Question Regarding Raising 2 million for first development with 8 already pledged - Ontario, Canada
Hello Everyone,
Me and a friend are looking at acquiring our first development project. We have 8 million pledged by one investor, and are still in need of 2. The land we are looking to acquire is in SW Ontario off the market and is owned by a family friend. We plan on building 50/50 condos and homes.
My main question is what is the best way to go about raising the remaining capital? (hitting up all the investment firms in Toronto?)
In addition, would it be wise to have an NDA before sending out the teaser to potential investors?
I thank in advance anyone with any relative advice.
Is the $2M you're trying to raise equivalent to the land value or is total development cost less: land $10M? If the $2M is all in the land, you should JV with the land owner and give them project level (non-promoted) returns on exit (pari-passu distributions based on their land value contribution as a % of the total equity required to do the deal). You could promote yourself off the LP equity assuming the $8M man is passive...
I think your first task would be to set up a one page summary clarifying the key economics to do the deal without revealing exact location etc..interested parties following this point should sign an NDA to further the discussion.
Being a first year analyst in the PNW, I am relatively new to the development world. Can you clarify your first paragraph? For example, if the project sells for $12M, what would those returns look like for the the land owner, LP, and the original poster? I am a little confused on the "pari-passu distributions based on their land value contribution as a % of the total equity required to do the deal."
Pari Passu = at the same rate or on an equal footing
In other words, let's say that for whatever reason, the OP is contributing $0, the Land Owner is contributing Land worth $2M (20% of Total Equity Capital), and the LP is investing $8M (80% of Equity Capital). Pari Passu returns would mean that, the land owner would receive 20% of the cash flow distrubtions, which is pari passu to their investment. The OP, if I'm understanding cpgame would "promote" off of the 80% of cash flow distributions remaining. For example, the OP could tell the LP that, after the LP has received a 1.5x Multiple, they will split all additional cash flows 50% / 50%. Obviously, the promotes can be sliced a million different ways.
I see, this makes sense. Thank you for the clarification!
Also, a return of capital structure could help you mitigate some sponsor risk associated with an IRR clock that comes with a preferred return to your investor. Duke alludes to this above, but essentially your promote would begin after the LP has recouped 100% of his investment. Frankly, you could theoretically roll your developer fee into the deal as imputed equity if you don't need the monthly cashflow to keep your lights on/pay bills. This might render you the 1-2% equity sponsor, with land being 20%, and LP being 78-79%.
Beyond the return of capital to your LP, you could propose a 10% of cash flows to you, 90% to them, or another split. Ultimately that's the negotiation point--the more you ask for, the more reluctant the LP will be to agree. I think the return of capital structure makes sense here because if something happens and you don't sell homes quickly, you aren't going to be giving all the proceeds to your LP. You'll still see your promote, as an ROC structure is agnostic on timing of contributions and distributions (sales proceeds).
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