Fl Keys Comm. Property, Redevelop or Sell For Less?

Question

Need Advice: 
I received my development order a few months ago and now have it extended for two more years from Fl. Senate bill 360. My overall plan is to redevelop my 30 year old boat sales and service business into a marine vocational school and workforce housing facility. My 2.6 acres is US1 frontage on Big Pine Keys, 30 miles from Key West. I simply donâ€™t have the money to move forward myself. Iâ€™ve contacted hard money lenders and would be willing to start the project except a clear exit strategy impossible to visualize because of the inability to have buyers for the 16 workforce houses. My plans for the vocational school (possibly non-profit), is a no brainer but will take several years to make it a working plan. I am unwilling to divide my road front property for only a workforce housing project which also may take years to achieve black ink.  My desire is to take on a financing partner but most would like a shorter term to finish which seems simply impossible.
The other option is: Sell the whole thing for less. What would you do?
NEED ADVICE PLEASE
The entire project may be viewed at its website but you will need to contact me for it.
Thanks to all that may reply,
Richard

Jon Holdman · Answer

Wow, tough project.   I wonder if you would be better off to separate the school project from the development project.

When I hear "workforce housing" I think of lower rent properties used by seasonal workers.  Its used here in the context of the ski resorts.  Real estate in the big resorts has gotten so pricey that the people who sell the tickets and load the lifts have no where affordable to live.  So, there has been a trend to building lower cost, high density housing in towns a away from the resorts.  Is this what you're talking about?  Would you keep ownership of this property and rent it?  Are these long term rentals?  Assuming these are long term (not nightly or short term vacation type rentals), the usual "50% rule" would apply, I would think.   Read in the Rental Property forum about the reality of rental property expenses.  There are several sticky threads right at the beginning of that forum.

If you're wanting to hold these properties as well as the school, you'll need to have some way to secure long term financing.  You will probably only be able to get that financing once the properties are complete and filled, and you can show actual operating data.  So, while I think your short term issue is how to get to this point, its essential you construct a set of projections for the rents and expenses for these properties one they're up and running, and validate its actually a profitable business.  Two businesses, really, the residential and the school.  If these don't work, then you're done.

Are you considering selling this housing either to its occupants or to investors?  That changes your business plan pretty significantly.  If you're holding onto the property, the long term viability is driven by the demand for these rentals.  If you're going to sell, whether as SFRs, townhomes or condos, the long term viability isn't so long term, and is driven by the market for selling these units.

Selling may give you better viability of the development project.  Don't know what kind of rents you're looking at, but if they're, say, $500 a month, you'll need to be able to construct that unit, all-in, for about $25K.  If you're going to get $1000 a month, you can go a bit higher, maybe $65-70K.  If you go above those figures, you won't be able to get any cash flow from the units once you've factored in all expenses and the debt service on your permanent financing.

OTOH, if you sell, you may be able to get much higher prices from investors (who often don't understand the reality of rental expense) and especially from owner occupants.

You need to know one way or the other so you know what your budget looks like.

Either way, I think your question is how you get through this development period.  I would suggest doing it incrementally.  I'm involved in a project similar to this.  Quite a bit larger, and will involved commercial, apartments, multi-plexes and a bit of single family.  The developer is doing the site plan and getting city approvals.  Then pieces are being sold to different builders.  The developer will do the horizontal development (utilities, streets, some landscaping), then the other builders will do the vertical development (buildings).  The first piece being sold and developed will be the commercial parcels off the main road.  These parcels are being sold at a discount to generate some cash.  But we're retaining partial ownership. So, we get some cash on the sale plus get a cut of future rents or sales.

You may have to think about a similar strategy.   You say you don't want to subdivide.  Why not?  Subdividing the residential into separate lots will make them MUCH easier to finance, especially if you're going to sell them off individually.  Do you have the money to get through the subdivision and horizontal development process?  Could you do that, then start by building and selling just a couple of the houses?  Everyone you build and sell generates some income to do the next few.

Don't know what its like in your area, but funding for this sort of development is very difficult.  The developer on the project I mentioned ended up going to private investors to get the increment of money needed to get the project going.  Its something of a shoestring project where there's just enough money to make a small increment of progress that will generate some more cash.  You're almost certainly going to need to take a similar approach.   If you can find a private or hardmoney investor to fund just one or two houses, show those will sell and generate some more capital, you may be able to get the ball rolling.

Richard Beal · Answer

Thanks Bill,
Because or LDR's here on my island, I had to go through the planning department which decided the best redevelopment and just what I wouold be allowed to do. Because of a rate of growth ordinance being in effect, I had to borrow forward all of the allocations for the next 15 years. Thus the workforce housing.......... When i could have sold each home for 250k plus it all seems easy, now it's truly messed up. Also, can't use it for motel, no allocations for that. Mostly it comes down to the prospective buyers are simply not interested in signing for 30 year loans right now. Most are unsure of their jobs.

Bill Gulley · Answer

Hi, I see that you have your idea about land use. I suggest you step out of that box. Talk to your county zonning folks and ask them what they see as the highest and best use. Ask an appraiser. Form your development around that first. Do you know a Tax Credit Developer? You can do SFDs and commercial in a mixed use project, You can partner with the dveloper as the land owner and survey property out that you would like to keep. HWY frontage is not really best for LIHTCs. Your school idea may be helpful as a non-profit, can you hook up with a local technical school, if so, they can get money for develp. or purchase part of the property if additional class rooms for, say small engine repair, etc, could be an option for them. Sometimes, a government agency/school never thinks of expanding until they are given a proposal and option to do so.
I guess I'm suggesting first, that you step back from your ideas and see what others in the area think the higest and best use might be, then step back in you thinking and see how you might paly off other ideas to meet you goals. Gosh, a motel might want it and buy it, or perhaps you could get off the main road and trade for more land that would give you more options. Good Luck, Bill

Richard Beal · Answer

Forgot to say: What i don't want to do is split the two ajoing parcels which are both commerical now. After I start the housing project, that parcel would change to residential. I simply won't sacrifice 1/2 to a low income workforce housing project when down the road there may be a better use for the 2.6 acres of US1 frontage. Not sure you viewed the project or not. Heres the website www.cayaplace.com

Richard Beal · Answer

Thanks Jon,
Sorry for the slow reply.
The housing depelopment is deed restricted and the buyers must make 70% of their income from Monroe county. I started it thinking it would fund the school but that was back in 2005. I have no thoughts of renting, just selling. Its a different ballgame now for sure. Yes, it would be better to do the school first now but moneys are tight for it also. I look to when it may become a realality but simply can't see it. (timing is what i'm speaking of)  Thus I'm thinking of simply dumping the intire acerage at a low price if it would sell at all.