First ever ground up development: 48-unit MF. Am I insane?

9 Replies

Hello BP,

I am in the middle of my first ground-up development deal - a 48-unit ground up MF - and need help determining if I am in fact insane for thinking I can do this as my first deal. 

My partner and I recently started a real estate investment company and were approached to raise equity for a 48-unit ground-up development in a sprouting northwest suburb of Detroit. We were slated to bring the final piece of equity to the table to complete the deal. The total cash requirement to meet the banks LTC requirement is about $1.7M. While doing so, a separate piece of the financing (PACE loan) was deemed unattainable and it tore the original deal structure apart. Then, the developers offered to sell our equity group the deal out-right in exchange for settling the debts and payables on the project and returning current investment principal, including a negotiated return on said principle (between 50%-100% on the money already in). 


This sounds a little crazy, I know. Allow me to explain: 


The current developers have been working on this deal for 2+ years and initially planned to fund the project using one of HUD's market rate financing products. After 2+ years of seeking HUD approval to no avail, they scrapped that plan and changed their strategy to traditional private equity financing - enter my partner and I (about a month ago). With PACE unattainable and a $300K excess in the "uses" on the proforma to which they had no realistic solution, the developers felt it best that they sell now and allow us to fund the project with equity and retain ownership and control.

Ok so here we are, they have now offered us the entire deal with an option to contract them to develop, or hire a new developer of our choosing. My partner and I see an alternative strategy, where we develop the project ourselves for a fraction of the fee and help bolster returns for our investors by saving the project money. Here's the catch: we have ZERO development experience. (Caveat: some of our investors have some experience and would contribute in a consultative hands-off way)


Candidly, we think the hard part of this development is over and now it is a matter of executing an already developed plan. This development is shovel-ready. We have all necessary permitting, environmental site assessments, and city and state approvals complete. We also already have the general contractor, construction financier, and property manager engaged.  From here, we foresee our job to be managing the relationship between the bank and GC during the construction phase and then managing the relationship with the property management company until stabilization, when we ultimately plan to sell.


Are we being naive to think we can handle it from here? What other tasks are involved in development after the entitlement phase is complete? What are we missing here? 

- MW




Not the move I would make but I am clearly more risk averse than you.  My thought process was always that in the beginning I was most susceptible to making mistakes and so if I was going to make mistakes I wanted it to be a small ones.  No deal is worth being permanently knocked out of the game.  

@Michael Wayne

Sounds very similar to a deal that I’m involved with but our deal is on a larger scale (244 units).

One thing I’d consider is engaging a superintendent that represents you as the owner. He’d be the guy to attend all the weekly meetings and could keep a good grasp on things without you having the development learning curve.

I say keep moving forward & poking holes in the deal til you’re comfortable with the risk level.

@Michael Wayne sounds like you might have a great opportunity to get into the development game. This is a small project so you can easily mitigate the risks typically associated with much larger projects. 

I would be happy to discuss the project with you. Feel free to reach out to set up a time to discuss.

It seems that you are already comfortable being uncomfortable. Congratulations, I'm sure you're well on the way to success. With this platform and the generous offers from previous post I'm sure you'll make a great go at it.

Thanks to everyone for sharing your thoughts!

@Brenda Jean Adamson-Cothran A superintendent of the project that we would hire and have them attend all city council meetings? Also, in your 244 unit deal, did you buy an already entitled deal?

You have a project manager to keep on top of this thing or would one of your present team be doing this?

if the bank is willing to go with you guys.. under the terms presented.. you have to start somewhere.

are their PG's on the loans construction take out.. also what is the total cost to build /  and what is the dirt worth fully entitled 

Originally posted by @Michael Wayne :

Thanks to everyone for sharing your thoughts!

@Brenda Jean Adamson-Cothran A superintendent of the project that we would hire and have them attend all city council meetings? 


It sounds like you are already past city council meetings and such correct? You mentioned its already permitted and ready to construct. Only the financing is what fell through. If you do need an owner rep my first suggestion would be to approach the architect who did the design and see what their fees are for doing this. If they have already been contracted to be apart of the CA phase for this then it might be very minimal addition to the cost if not already factored in. On of the architects professional standards is to be the 3rd party intermediary between the owner and the contractor (and the city council). If the architect can't or won't do this for some reason there are 3rd party companies that specialize in being the owners rep on projects like this. But the architect should be your first choice as they will know the project better than anyone else. 

I will add that once projects become large enough, yours isnt IMO,  that it makes since to have both an architect and a 3rd party owners rep.

 

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