Can’t find an investor for development site

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Can’t find an investor for development site

Boris Babakhan
Developer · Fresh Meadows, NY · Member since 2010 · 12 posts · 4 votes

Hi BP,

I have purchased a vacant lot, got the plans approved for 31 unit residential building in NY.

and ready to build.

I need to get investor who can fund

40%, I want to fund 10% and bank will do the rest. In return I am offering 40% of equity to investor.

Investor will get 1.5m return within 24 months on 2.5m invested.

Do you think it’s a small return? Or there is something I’m missing?

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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
7y

How do you know the accurate costs associated with a build this size? Is it even the right time in the cycle to build such a property where the lot sits? What are absorption levels for inventory in the immediate area? 

Have you ever watched Million Dollar Listing New York? Fredrick Ecklund and Ryan Serhant sell off lot's of these development deals when they are being finished. They know lot's of developers big and small. You might want to see what you find out for thoughts on stabilized resale values etc.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    7y

    Well, while you certainly deserve equity for putting the deal together, assuming it’s a good deal, you Are asking an investor to put up 80% of the cash for 40% of the equity, while you are getting 60% of the equity for 20% of the cash.....

    1Reply
  • Boris Babakhan
    OP
    Developer · Fresh Meadows, NY · Member since 2010 · 12 posts · 4 votes
    7y

    @Wayne Brooks

    Thank you for your comment.

    After some reading and research I have found that most syndicated deals are structured that way. I found that sponsor only uses 5-10% of his own funds and also responsible for managing the whole deal.

    0Reply
  • Karen MargraveBusiness Member
    Moderator
    Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
    7y

    @Boris Babakhan there's too many unknowns. First off, you're asking for an investor to fund 40% of the deal, and bank to fund 50% and youi 10%, but you don't say how each investor will be secured. One of them has to agree to be in 2nd posiiton. Also, what are your values based on? Do you have an actual appraisal? Any lender is going to want to know what your experience is in managing projects, etc. , so what is yours? What will make the investors feel comfortable lending you money? What protections are there for the investors? Do you have someone outside of your business handling the draws, with inspections, etc.? Lenders want as little risk as possible, and the thing you need to do is mitigate their risk by bringing money and/or experience into the deal. 

    0Reply
  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    7y

    @Boris Babakhan this is probably a better post in the multi-family/apartment/commercial forum but if you are talking about syndication there are a TON of rules to something like that.  Like SEC type of rules.  Keep going research.  There may be a way for you to make money on a deal like this.

    1Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    7y

    How do you know the accurate costs associated with a build this size? Is it even the right time in the cycle to build such a property where the lot sits? What are absorption levels for inventory in the immediate area? 

    Have you ever watched Million Dollar Listing New York? Fredrick Ecklund and Ryan Serhant sell off lot's of these development deals when they are being finished. They know lot's of developers big and small. You might want to see what you find out for thoughts on stabilized resale values etc.

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    2Reply
  • Boris Babakhan
    OP
    Developer · Fresh Meadows, NY · Member since 2010 · 12 posts · 4 votes
    7y

    @Karen Margrave

    Thank you for your comment. Each investor will be secured by becoming a part owner on a corporation that already owns the lot. And in terms of experience and information on the property that’s part of due diligence information that I provide to investor. I believe most of the things you mentioned are more geared towards the loan but I’m offering equity partnerships.

    1Reply
  • Boris Babakhan
    OP
    Developer · Fresh Meadows, NY · Member since 2010 · 12 posts · 4 votes
    7y

    @Andrew Postell

    @Andrew Postell

    Thank you for your comment. I am talking about syndication or joint venture or equity partner. And yes I am familiar with required registration with Sec as Reg D. However, I first tried to see if I can find any interested party before going into all legal expenses on PPM and filings.

    0Reply
  • Boris Babakhan
    OP
    Developer · Fresh Meadows, NY · Member since 2010 · 12 posts · 4 votes
    7y

    @Joel Owens

    Thank you for your comment Joel. I have done few Developments and I am GC myself and I know the construction cost based on my experience, plus My plans are approved and it’s easy to receive actual accurate bids from contractors. In terms of the right property and absorption: I am not looking to sell it, my goal is to rent it out and refinance with permanent mortgage once the project is complete. An investor will have an option to either take his original invested money and stay on as owner on his portion to collect rent and build equity or I can buy out his portion right after refinance.

    1Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    7y

    If rentals you still need to know absorption levels for rentals and what amenities the competition offers to arrive at a projected lease rate and how fast it will be to fill up and stabilize.

    I would want to know for instance that there was no rent control looking at  a project like that and that demand was high for rentals and most places were full. I generally would not want to develop if occupancy was falling for the market or rents were softening at top cycle for most markets nationally. Development is all about timing and demand. You could have the right time and wrong piece of dirt or the right piece of dirt and the wrong time to build the project. The highly successful developers have the right dirt, with the right costs, to build at the right time for demand to put the odds in their favor.  

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  • Ivan BarrattBusiness Member
    Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
    7y

    @Boris Babakhan research preferred returns and profit splits. This should be set up as a private equity deal with one or two well heeled investors.  If I were you I would certainly have a well qualified real estate / securities attorney involved in the venture.

    1Reply
  • Boris Babakhan
    OP
    Developer · Fresh Meadows, NY · Member since 2010 · 12 posts · 4 votes
    7y

    @Joel Owens

    Joel, this lot is located in Bronx where vacancy rates are 1.7% and city offers 35 years tax abatement, for exchange of 30% of apartments to be rented as affordable housing, at 130% AMI. That equates to section 8 rates. For this particular project I have estimated all rent-roll based on section 8 rates which is also suitable for the area. In terms of occupying the building, once completed it will take no more then 1-2 months.

    0Reply
  • Boris Babakhan
    OP
    Developer · Fresh Meadows, NY · Member since 2010 · 12 posts · 4 votes
    7y

    @Ivan Barratt

    Thank you Ivan. I will definitely look in to that.

    Does anyone know a well qualified security attorney for projects like these?

    0Reply
  • John Nachtigall
    Santa Rosa, CA · Member since 2017 · 325 posts · 701 votes
    7y
    Originally posted by @Boris Babakhan:

    @Wayne Brooks

    Thank you for your comment.

    After some reading and research I have found that most syndicated deals are structured that way. I found that sponsor only uses 5-10% of his own funds and also responsible for managing the whole deal.

     Well I would say you are half right, sponsors do put in 5-10% normally,    It they don’t take that much equity.   In my experience, for a ground up, high risk deal like this it would be a waterfall like the following;

    -  8% preferred return for investor

    - return of investor capital

    - catch up contribution to sponsor to equal 8% of their investment

    - something like 30-70 split till 15% IRR

    - 50-50 after that

    There would be some 2-5% sponsor fees off the top.

    That is what you can get from an experienced sponsor with decades of success and billions in management   If you want some examples check out the PPM on CrowdStreet or RealCrowd to see real life examples.

    1Reply
  • Francis Morris
    Member since 2018 · 45 posts · 12 votes
    7y

    @John Nachtigall thanks for your comment. Do you have any recommendations as to where I could see an example of one of these deals structured? or further reading? Newbie and would like to learn more. Thanks

    0Reply
  • Boris Babakhan
    OP
    Developer · Fresh Meadows, NY · Member since 2010 · 12 posts · 4 votes
    7y

    @John Nachtigall

    Thank you very helpful.

    0Reply
  • Jai Reddy
    Edmond, OK · Member since 2012 · 456 posts · 270 votes
    7y
    @Joel Owens Brilliant comments, in general.
    0Reply
  • Charles Kao
    Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes
    7y

    @Boris Babakhan

    What is your track record? Most syndicators are building their group of investors to solicit through trust with free content, social media presence and more personable methods. I personally couldn't give you advice on whether those numbers appeal to me because I'd have to know alot more but if its that much cash for that little equity you have to factor in the bank will likely require they sign so you are asking for cash and recourse. Thats a big deal.

    0Reply
  • Alina Trigub
    Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes
    7y

    @Boris Babakhan

    You've got a ton of great advise already. You should calculate the investors' returns based on the option you chose: JV (equity vs debt) vs syndications. The returns will differ for each case. Also, you will need to hire different type of attorney depending on whether you go the syndication route or JV. I can give you a few local contacts in NY area. Feel free to PM if needed.

    Best!

    0Reply
  • John Nachtigall
    Santa Rosa, CA · Member since 2017 · 325 posts · 701 votes
    7y
    Originally posted by @Francis Morris:

    @John Nachtigall thanks for your comment. Do you have any recommendations as to where I could see an example of one of these deals structured? or further reading? Newbie and would like to learn more. Thanks

     Hi

    You can join CrowdStreet, RealCrowd, and Other crowdfunding sites all for free.   They have dozens of offerings at any time and each deal has a PPM you can read (make sure to drink caffeine before hand, they are boring).    You can also watch the webex presentations of the deals.    

    I would also recommend a book called “Investing in Private Real Estate” by Sean Cook.   It defines what to look for in deals for investors, so it can guide you as a syndicator also.   Available on Amazon   

    Finally Origin Investments, a very high powered syndicator, has an excellent blog about syndications   I would read them all but this one is specifically about waterfalls

    https://origininvestments.com/2017/12/28/what-are-private-equity-waterfalls-clawbacks-catch-up-clauses/?highlight=Waterfall

    Good Luck

    0Reply
  • Boris Babakhan
    OP
    Developer · Fresh Meadows, NY · Member since 2010 · 12 posts · 4 votes
    7y

    @John Nachtigall

    Thank you for good advice.

    And I also thank everyone who participated in this discussion, every bit helps.

    0Reply
  • Tim Johnson
    Lender · Grand Rapids, MI · Member since 2018 · 703 posts · 446 votes
    7y

    Hey Boris, I'm also a GC and understand what you are going thru.  I have access to a good private money source that likes to do the deals you are talking about.  The only negative you have is the State you are in.  New York is hard to get deals approved. I'm in Michigan and they would jump all over this one.  I'm a builder, but I enjoy making deals comes together more than than the actually building.

    You numbers look good, you have a full scope of work worked up yet with bids from subs to back it up.  

    Do you have a at least 2 HUDS, to provide proof of your experience.  2 completed deals that you have sold?

    Do you own any rentals?

    Feel free to PM if you don't want these answers in public.  

    My private money lender doesn't like New York, but I can give you some advice on how to present the deal to someone who does.

    0Reply
  • Anastasia G.
    Lender · NJ NY PA CT GA FL, Puerto Rico · Member since 2015 · 213 posts · 111 votes
    7y

    @Boris Babakhan do you have any investor materials put together? We do JVs and developments

    0Reply
  • Boris Babakhan
    OP
    Developer · Fresh Meadows, NY · Member since 2010 · 12 posts · 4 votes
    7y

    @Tim Johnson

    Thank you Tim,

    luckily today I've met a builder who builds in Manhattan for the last 8 years. He looked at the deal and agreed to put up a difference and go JV on my Project. So it seems that I'm actually going through with that project.

    But I would love to hear what can help me raise money on my next project.

    1Reply
  • Boris Babakhan
    OP
    Developer · Fresh Meadows, NY · Member since 2010 · 12 posts · 4 votes
    7y

    @Anastasia G.

    Hi Anastasia. I do have some material and would love to send it to you. However, if it is something you will like then I'll come to you with next deal since today I have finally found a JV who committed to go with me on this project.

    0Reply
  • Anastasia G.
    Lender · NJ NY PA CT GA FL, Puerto Rico · Member since 2015 · 213 posts · 111 votes
    7y

    Thats great! congratulations! Sounds good, we do development JVs, we own over 1,000 doors and manage close to 3,000 doors, always expanding. 

    0Reply
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