WHAT WOULD YOU DO? HARD MONEY - J.V. PARTNERS ??

Question

I want to get your opinions on a few things, and I know some of you Bill Gulley Bryan Hancock Ann Bellamy Rich Weese have experience with J.V. Partnerships, Accredited Investors, HMLs, so please chime in.  THIS IS NOT A SOLICITATION FOR MONEY BUT FOR ADVICE!

Say a person has a project to develop and needs to borrow construction money of (hypothetical) $2,500,000 and the value upon completion would be around $4,000,000.  A hard money lender will want 4-5 pts. and 12%. What percentage do you think a J.V. partner would want?

Also, what other options are there for financing such a deal that you know of or have used? Would it be possible to get several accredited investors and pool their funds? If so, who is used to orchestrate, a mortgage broker, attorney, or ?

Is it legal to solicit investors, and/or joint venture partners, or does a mortgage broker need to do that? I don't want to get into trouble!

We've always used mortgage brokers and HML's, I just want to understand options.

Paul Falbo · Answer

Karen:

We built a speculative office condo project by forming a LLC, made up of 10 investors.  (No mortgage brokers)  The operating agreement basically "split" the returns to each individual based upon the cash contributed.  The managing member of the LLC, brought the deal to the other investors, and carved out a 25% position on returns up front  That was basically his "fee" for putting the deal together, putting together an acquisition and construction loan, purchasing the property, etc.,  I can't remember the particulars; but, 12 members put in close to a million dollars.

The "paperwork" on the LLC was completed by a "member" attorney/CPA.  The project spanned two years (groundbreaking to sale of last unit).

Your hypothetical is something that should attract knowledgeable investors, assuming a good track record, demand, etc.

Currently, I'm seeing JV partners wanting 51%-55%, plus control.  In speaking with active lenders, LTV's can be as high as 75%.

Will Barnard · Answer

Karen, as Tom pointed out, using debt financing will be less expensive than equity financing, but in answer to your question, you would need to do a registered filing with the SEC on something of this size and that would be accomplished through your attorney, one familiar with SEC deals. Should be under $20k to do this task, a small price to pay on seven figure deals.

If you go straight JV on it, I as the money partner will want 50% and guaranteed minimum returns on my money. This would be your most expensive option in my opinion.

John Miller · Answer

On any given investment opportunity, you have to evaluate what your expected returns are going to be, and then you consider the funding source. if you are looking for 15% and greater, then you would have to realize a 30%+ return if you were going to JV. If you know you can get a deal on a property that the NOI can carry the note, then look for private money, before you look for hard money, or look for a JV to go with you on the purchase, writing the duration in the agreement so that you can buy out your partner after a period of time. there are cash flowing opportunities out there, where lenders would be happy to rake you across the coals. there are so many lenders available now, just watch for the frauds, you are really in the drivers seat, you set the terms, and dont get pressured into a situation that would jam you up on a balloon.

Isaac Blocher · Answer

@John Miller Thank you for updating this blog. How do JV partners get nowadays? Plus is there a way to fund a deal at 100%, be in 1st position lien and still ask for 50% of the profit after the deal is done?

John Miller · Answer

a lot has changed from four years ago when this article was written everybody and. Their dog is now the source. And JV programs are on every corner. Instead of crowdfunding you have two pool together and make hue transactions.

The rehabber market is folded, but nobody is giving direction to these new entrepreneurs. I will be working on so projects where we are basically designing our own customize loan package. There is too much money to lend and not enough educated borrowers.

If you have the drive to get something done it will happen.

Karen Margrave · Answer

Will Barnard Bill Gulley Paul Falbo Thank you for your answers. Paul I was actually thinking about a similar scenario today. We've built office condos in the past, and also a few different small office PUD's. However; on new construction the condos aren't actually condos until they are completed and record. I guess you could have 4 lenders or potential buyers for each unit, with a divided interest, and upon recording the condos, they could take title or unit could be sold and they get paid off. Is that basically how you did it?

As I said, I'm just trying to figure out different scenarios. Obviously the hypothetical was similar to what we are doing, but I honestly wanted your feedback, not to solicit lenders; and thought I'd have to give you enough info in order to offer opinions. The deal we are doing is slightly more than hypothetical, but same percentages basically.

Bill, in the past with projects we've always had funds disbursed by the title company, we don't put the money in our account. However; there are different loan servicing companies, and ways to handle disbursements to cover all the parties so that the funds are never misappropriated or withheld, etc. (it's a 2 edged sword) With a private lender we use on residential, he has us take pics of the job, with a copy of inspections done by City, and releases funds accordingly, and he's done several deals with us.

I appreciate all of your feedback. I knew I could count on your to point out the pros and cons, and share ideas.

Bill Gulley · Answer

Karen, my favorite set up is as Paul described but usually 3 members, if more are needed another LLC becomes a member with 3 others. One aspect that may help you with member/partners is putting some of your construction management oversight outside your control. By that I mean construction inspections for accounting and disbursements verified independently. While we trust the contractor, funds are still treated as if they were comming out of a bank, lien waivers, etc. A contractor that might miss something could cost them, we have had contractors that misused funds (materials ended up on other jobs) and such can happen with good intentions and just get behind, nothing illegal, just that you can get behind. It limits the potential for fraud, mismanagement and overruns.

Another aspect to is having the LLC finance the deal, everyone has the same risks if they bellied up for the 20-30%.

I'd also suggest you consider who may buy the project, pre-selling or pre-leases will do alot to set nerves at ease for a bank or investors. :)

Dawn Anastasi · Answer

Sounds like Will might be hypothetically hinting at something. :)

Will Barnard · Answer

Karen, I am with you. Sometimes, it is the availability of funds that is more important than the cost of them. Going the JV route may be better for this takedown, and then again, perhaps not. You should look into the registered filing just to get an idea of your options, but for sake of ease, speed, and simplicity, the JV route is tough to beat.

Hypothetically, if I was to get involved in this hypothetical spec deal, I would want to see performance history, all the facts and figures, and then negotiate my terms based on what I find.

Karen Margrave · Answer

@bill gulley, @will barnard would be a spec, construction loan. I realize HML may be cheaper, however lenders for spec, new construction, and commercial  are harder to find, no matter how nice the deal. JV partner may be easier, saving time & $ though taking higher % in the end for the risk. So half a pie over none ?

Those numbers are not actual, but similar, as its hypothetical, so I can get your expert feednack.

WHAT WOULD YOU DO? HARD MONEY - J.V. PARTNERS ??

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