I've been asked by a religious organization that owns several acres of land to help them develop an 80+ unit, 55+ community.
I've never developed on "Tax Exempt" religious property before and I'm not sure the best way to go about this.
The goal of the religious organization is to provide income to their organization from the rent and thus creating long-term sustainability for their organization. At the same time, they want to provide housing opportunities for their community.
They are looking to us to bring capital, construction financing, construction company (Basically everything).
Some questions I have for BP:
1. Is the best vehicle for this partnership going to be a JV?
2. If they do not want to split off the land from their place of worship, will that be an issue? I'm guessing the lender and investors will want this as its own separate parcel. (This one is really stumping me).
3. If the religious organization has some capital, but not a lot, and you are expected to bring the rest of the equity as well as everything else that comes with developing, what is a fair split to bring our development skills and resources to the table? Fees? Equity? How much?
4. From a moral viewpoint, I'm not sure if I want to own equity with a religious organization. I don't think I have it in me to foreclose or sue them unless they were extremely malicious in their actions towards me.
Thank you for any advice you can give!
Fascinating situation here!
I'd think about it like this:
1) I agree that it seems hard to fathom a situation where you don't split out the land and parcel as a separate enterprise.
2) It doesn't sound like this is a charity case for you, it sounds like a business deal. Make that clear upfront. If you bring the capital, the loan, and develop the property, then you control the enterprise.
3) An exit needs to be planned here. Or better yet, several exit options. You need to be able to sell the complex, sell the individual units, or hold the complex and generate cash flow. You will need to be able to refinance the complex in the event that you hold onto it. These exit options cannot be handcuffed by the organization's desire to hold onto the property. They need to be controlled by the deal sponsor (you).
If the organization's goals differ from these, or preclude you from reducing risk or creating a high-probability economic outcome for you, then this might not be a good deal for you.
If they want to build units that they offer for free or very low cost to members of their parish, then they should be raising the funds, including donations and debt, and simply paying you or another party a fee to do the construction at a fair price. It's not reasonable to expect you to raise the capital for construction, do the work, and then be handcuffed to an unclear set of economic outcomes downstream in my opinion. The bank will certainly not be understanding in a few years if the exit option preferred by the church does not come to fruition, and you will be on the hook.
Just some thoughts:
1. You can call it a JV, but I would assume a GP/LP structure may work best. The last thing you want is a power struggle and not have control of the project.
2. You would have to go through planning anyways to plat the project, I suspect the best way would be to break away, however will the zoning and tax designations change?
3. Work backwards and do some residual land value on the entirety of the project. You could put their land contribution on the LP side and keep a 30/70 split or whatever works.
4. Proper Structure, try to have them contribute the land on the LP side, and then control the project. If it's treated like a normal project (regardless of the religious partner) everything you should be clean and laid out like a normal development. The problem I see in this, is that they are asking you to do everything, but yet want to remain in control of everything. If they want to be on the GP side, maybe they need to bring more to the table than just dirt. Seems like further discussion would be required and with 80 units, it may be too small on the buy and hold side to really get property management covered properly amongst other things being a bit smaller and new.
“The goal of the religious organization is to provide income to their organization from the rent and thus creating long-term sustainability for their organization. At the same time, they want to provide housing opportunities for their community.”
Tax free income..
From a moral standpoint, I personally wouldn’t do them any favors. Actually I wouldn’t do a thing for them.
Thank you very much for your insight.
1) I agree that any investors or lender is going to want it to be its own entity unless the religious organization brings all of the capital to the table.
2) Got it. Business deal. To take the risk and spend the 2 years making this come to fruition it has to be financially beneficial. The fact that I get to help the organization is a side-benefit.
3) As the deal sponsor, I agree. Control is going to be everything if we are to make this successful for our company.
Very helpful defining the most viable partnership structure.
Can you expand on #4. regarding your statement: "... it may be too small on the buy and hold side to really get property management covered properly amongst other things being a bit smaller and new." Very interesting line of thought.
Are you saying 80 units is too small to hire a full-time property management employee and still make money for my company? What would be your ideal unit minimum to also make it financially feasible to make money with property management? Is there a minimum gross rental income a project needs to bring in to make it viable? For example, $2,000 per unit at a minimum of 100 units?
For example, if it only makes sense at 100 units, under what circumstances? Would you charge 6% of gross rent plus leasing fees?
I know I've just asked a lot of follow up questions, but your statements are extremely helpful in regards to that discussion that I will have with this religious organization. I've developed commercial retail property before, but never multifamily on this scale so I am learning a lot from you guys. Thank you!
@David Friedman know two investors that got involved with religious organizations and neither ended well.
Why not just focus on acting as a GC for them with no ownership?
More than likely, they have a loan on their church already. They should be able to get a development with that lender pledging the church and land as collateral. The rest, they can raise from their members.
They will probably balk at whatever price you give them, expecting you to give them a "Holy" deal.
@Drew Sygit Yes, a fee only relationship is probably the best set up for the long term. Less issues, they can control the property. I can make my money and be free of any “guilt.” I will most likely tell them a fee, ensure they have the capital and capabilities to get the project paid for and just make my money and move on. I will be very clear that I can’t spend 2 years of my life and my team’s life chasing an impossible project. I’ll report back after our first meeting.
What @Paul H. said in his response #2 is what I was thinking as well. If you break off that parcel, is it even zoned for this type of development, and if it is broken off from the church would it then become taxable? I would think it would but that certainly depends.
If you come on as a development partner they will lean and rely on you to figure that piece out. As a GC you can assist, but ultimately that responsibility wouldn't fall on you.
@David Friedman - It may surprise you to know this happens quite frequently. I have see it done on many Catholic properties. If a Catholic property is sold the proceeds go to Rome. If the parcel is leased, it remains with the local Church. As such, there is a land lease for the property which is then developed. The assets in this market have ranged from Condos, Townhomes, Single Family homes, retail, commercial and office. It provides income for the local church and the properties are developed.
If the local religious entity wants to develop and lease their own space, it would seem any involvement would need to be a fee based agreement. An attorney with a strong background in 501(c)3 would seem best to consult on the best structure.
Quote from @Scott Mac:
Can this housing be for only one religion without being in violation of Fair Housing (???)
Definitely not. They can rent a downstairs space to a Jewish Deli if they want, but they could not discriminate on the housing component.