Partnering with a contractor to be able to get funding for new construction?

Question

I want to do a build to rent project but the only way to get funding is to partner with someone who has done more than 3 new builds. I've personally only done 1 so far and my partner has done 1 renovation project.

Has anyone partnered with a contractor before to be able to do this?

Stuart Udis · Answer

I agree with Chris.  It's very difficult to align interests when your JV partner is the contractor with limited exceptions. I am surprised a contractor with 3 complete projects worth of experience is a requirement for you to obtain funding. Typically lenders want to vet the contractor but haven't come across a partnership requirement. I would recommend searching for other lenders who offer a construction loan product. If a lender finds you to be a satisfactory guarantor, there is a sound thesis behind the project and you retain a vetted GC, you shouldn't have trouble funding a project but you have to be able to satisfy these three requirements.

Mike Klarman · Answer

The Ground Up programs are the tougher to get into than the Free Masons.  Here's the catch with those programs:

1) Getting in the program as a 0 exp in GUC is impossible

2) Even when partnering with a builder, that builder will only get credit for the builds he's done for himself.  If he has done 50 new builds for clients he gets 0 exp for that.  Kinda crazy, but that's how it works.

3) The loans themselves have a nightmarish processing period.  Everything but your blood type will be asked for, the builder will need to have their house in order and be in good standing as well.  Plans and drawings and specs will be asked for.

4) The ground will need to be build ready in most cases.  Most will only fund on the vertical build.  All that underground work that is needed may fall on you.

5) In most cases, usually the investor buys the land and gets it build ready and then they go to the lender with plans on the build.  The lender will then cash you out 50% - 60% of the raw land value but the vertical build money goes into escrow and works much like a rehab fund.  You complete work, you apply for a draw, funds are released.

It's almost like lots of lenders who have GUC programs are telling you that you need to get a few done in cash first and prove you know to get these done and are in bed with the right builder and then they will look at your deals.

Austin Steed · Answer

The largest development I've done we didn't have to partner with the GC but the bank did underwrite them. Reviewed taxes, liquid funds this kind of thing. This was on an 11 unit property in Columbus and construction loan was 1.1M.

I personally wouldn't partner with a GC, unless I knew someone very well and even then wouldn't be likely. I would recommend trying to build more relationships with bankers. More community banks that will do construction loans on a portfolio loan. Hard money lenders probably won't underwrite a GC too extensively or at all but you'll get beat up on points and rate.

If going the build to rent route your ideal scenario would be to get a construction loan that rolls into perm financing once complete. Only one closing and no surprises if rates change again at all.

Don't forget to add development fee with bank to your business. Will help your CoC returns.

Best of luck!

Chris Seveney · Answer

@Nick Hummel

I would partner with my ex wife and her family before ever partnering with a contractor.

There is an inherent conflict of interest there if their equity is tied to doing the work, they have no incentive to keep the price down.

Nick Belsky · Answer

@Nick Hummel

There are a few lenders who will do GUC with no experience but their UW process is grueling to say the least.  Very expensive and cumbersome to process, in my opinion.

Contracting with an experienced builder is a better way to help get you better leverage and terms.  Although, still won't be as good as if you have the required experience yourself, you can get most of the way there. There are a few lenders that will allow the loan to be based on the builder's experience in conjunction with your own.  There are different leverage tiers based on that combined experience but they are not unreasonable given the current market.  Some lenders have discontinued GUC programs all together whereas others are being fairly aggressive on terms right now.

I'd recommend speaking with a broker who knows GUC and has solid resources with GUC lenders.  They can help take a lot of the guesswork out of this for you.

Cheers!

Jeffrey Stasz · Answer

@Nick Hummel

you need to check with your building department. NC is a NASCLA state and build to rent is typically treated as a commercial project. So unless you already have a Commercial License you will not be able to pull the permit for this project.

And if you plan on pulling it as an owner most NASCLA states have a 2-5 year period where the property cannot be rented or sold. This information is typically recorded on the title.

Mike Klarman · Answer

What do the numbers of your deal look like?

Mitch Davidson · Answer

Hi Nick. We meet the 3rd Wednesday of the month (6PM at Hi-Wire's River Arts location) and the 4th Wednesday of the month (9AM at The Rhu, upstairs). The schedule was different for November due to Thanksgiving. This month we'll meet on the 20th and 27th. No need to RSVP. It's a casual group. We start off with some intros and questions and then have some great organic discussions about a variety of RE topics, strategies, questions, problems, etc.

Nick Hummel · Answer

Great, so if the budget came from a GC would I still be able to act as the GC on the build? Do you have a website or email I could apply through?

Nick Hummel · Answer

Awesome, is that every week?

Partnering with a contractor to be able to get funding for new construction?

Most Popular Reply