Building Under Contract - ROBS funded - Possible Construction Loan?

[Marcus Williford]

Greetings,

I'm a part-time owner/builder (with experience in residential a few times, with good success).  I have stumbled on ROBS funding (401k related), and have formed a corp (ROBS requires this) to purchase a 6500 sqft abandoned building.  I have hired an architect, structural engineer, env p1 study, and so far the analysis looks good.  I have the building under contract for what I think is a good price.  Structural refit is needed, but I believe I can do most of the work myself, following the guidance of my engineer.  I have a pre-planning meeting with the city scheduled, etc... Lots of due-diligence stuff, and mostly going well, zoning looks good for my end goals.

In the end, my goal is to own the building (c-corp owned by my own 401k), run a business out of the 1st floor commercial area (mixed use), and collect rents for the remaining residential units.  I have legal assistance on the 401k ROBS funding, so that is solved, don't need advice on that part.

Funding Concerns:

- I thought I had enough cash to buy the building AND fix it up (at least partially), now I am not so sure.

- I found out from my architect that the city may not like my approach of multiple phases, they have min units for multi-family / mixed use.  I guess this building is small enough that I can't meet the minimums by building on 1 floor only.  My plan was:

   - Phase 1 - All infrastructure (retrofit, fire, water, electrical), + 3 units on top 3rd floor.  This gets the building safe, legal, valid occupancy permits, and some cash flow.  At this point I'd be in good shape, own everything outright (I have enough cash for this phase).  Floor 1 and 2 would be warm shelled, ready for development.  I'd be ready for Phase 2, no cash left, but lots of risks removed.

   - Phase 2 - Build out remaining floors with Infrastructure already in place, likely 6 more units, total of 9.  In my area, this could be like $25k/month gross rents, easily.  Costs in this phase would be framing, HVAC, basically the units themselves.  probably $400k, but lower risk and straightforward things.  The return on cash would be a no-brainer.

Problem:

- The city (Oakland Zoning) wants my Phase 1 to be minimum of 5 units, which puts me over some thresholds where I need ADA in Phase 1, I'd need a unit on 1st floor, and hit with additional impact fees in phase 1.  So, because of the city planning, i'm required to bite off more scope in my first phase.  

- My concern is that I'd get 3/4 through with the plan and run out of cash, in that case I'd be looking for a construction loan on an owner build commercial to residential conversion.  I'd have a really good equity position, since I would have paid cash for the building and all of the phase 1 construction.

- Would my ROBS structure (owned in c-corp), prevent me from getting a loan, as i'm not sure I'm allowed to personally guarantee any loans.  Asking my lawyer about this.  Anyway, what sort of loan would I get? 

- Are there other creative solutions?  I feel like I can tackle this project, and it would be a great reward (I like this sorta thing), but am now puzzled by a city imposed minimum unit requirement.

I don't want to back out of this deal, the profits and cash flow look good to me.  After the building is done, I could even carry the small loan and have a lot of cash flow and equity left. 

[Matt Devincenzo]

I'll leave the possible ROBS part alone since I know about it, but not enough to provide advice. Maybe @Dmitriy Fomichenko can provide some info, or know someone who can. 

As far as the zoning/phasing...typically we would address that here with a 'Master Plan' or a 'Phasing Plan', so I'd ask if something similar is available there. When we master plan or phase, typically the only number that matters is the end, along the way your minimums don't 'count' because the project is being considered as a whole. Caveat is if there are safety items like 30 units need secondary fire access road, so the phase that hits 30 units also has to be the phase that builds the secondary access road if it isn't in yet...that kind of thing. 

Locally it isn't spelled out in the phasing rules regarding minimum units either way, so if locally they want to apply the stricter standard they could. I'd call someone in the planning side who is looking to get units built and explain how their perspective can kill the entire project resulting in no units...so maybe they can help the discussion on phasing it your way vs. the other way.