private money for development and new construction

[Ron Czecholinski]

I am working on my first small development (10 houses) and putting it together with private money. I have purchased the land and have some interested investors. I am now looking for insight on putting together agreements and handling escrow / draws for infrastructure and construction loans.

I have been looking for a simple construction loan agreement and not finding much except from a local bank which seems much more complicated than necessary. I am also wondering if there are other agreements that I need.

I also am looking for a way (if possible) to handle the escrow and draws without paying interest on unused money.

[Jon Holdman]

Are you saying that you are getting money from multiple individuals, pooling that, and using the money to do your development project? If so, paying interest on the unused money is the least of your problems. I actually have an investment in a project very much like this.

You need to set this up as a private placement under Regulation D. You will need to do a significant amount of for your operating agreement and private placement memorandum. I've been told its about $25,000 in legal work to set one of these up. Certainly, there is a big stack of paperwork for the one I'm involved in.

For better or worse, you are "selling securities", so your project falls under the jurisdiction of federal and state securities laws. All of this red tape is intended to make your investors fully aware of the risk. That PPM, for instance, will say something very close to "this is an incredibly risky project. you are very likely lose all your money. Only an idiot would invest in this project." That's really meant to protect you from your investors if things do go badly.

An alternative is to set this up as loans. The investors are loaning you money for some specific purpose. If your investors are funding 100% of the project, you could do it as a series of liens on the land you've bought. That leaves someone in last position, and that's a very weak position. But if you're going to use this money as the "down payment" for going to a bank and borrowing the rest of the money, you'll probably need to formalize it.