I'm considering a new student housing development at a nearby university with a chronic shortage of student housing. I'm curious about financing the project - specifically, how would I convert it from what I assume would be a hard-money / private-money / short-term loan from a friend / family member into a long-term permanent financing type deal?
I'm thinking I need $1M to build out phase 1 of the project (purchase land, complete horizontal construction, and lease up the units). Once they're all leased up and the property is operating at a profit, I'd go to a bank and say, "Look, it's a viable concept, we completed phase 1 without screwing anything up, units are all leased and generating profits, and we have a waiting list for phase 2 and 3 units. Please loan me the money for phase 2 (or phase 2 and 3)."
Assuming I have to borrow the $1M from HM/PM/FF, what do the terms look like? Obviously I don't want to pay 12-14% for years, but I figure I'm going to have to pay an elevated interest rate for a while. How long until a conventional lender will loan against the project and allow me to continue with phases 2 and 3?
At this scale the rough process is as follows:
1. Bring on equity investors to secure the dirt and front the costs associated with getting phase 1 shovel ready.
1a (depending on experience and local lending environment) Deploy additional equity capital to do the horizontal (roads, sewage, sitework)
2. Bring stamped plans and permits to a local lender with your pro-forma. Secure commercial construction financing for the vertical portion of the build. They will generally take a first lean position on the dirt and associated IP
4. Lease up and sell phase 1 cash flow or convert that phase 1 debt to a long term loan and retire the previous debt.
5. Phase 2-3 rinse and repeat.
For me the easiest way to understand the role of a developer is as a bond maker and seller. You take a non-cash flowing piece of dirt. Add capital and create cash flow and then sell the cash flow.
Thanks @Jeffrey Stasz . Number 4, "Lease up and sell phase 1 cash flow or convert that phase 1 debt to a long term loan and retire the previous debt," is specifically what I'm looking for more information on. I am assuming that I can't lease the initial units in August for the fall school term, then walk into a bank in September and say, "Look, we're at 100% occupancy and cash flowing, please convert my short-term debt into a long-term loan, and also I need more money for phase 2."
@Andrew Taylor the typical seasoning period is six months. It could also be a year.
If you choose to sell then you can sell at any point but the discount rate applied to the cash flow may be more of a discussion to reflect the uncertainty of a new product.