Seeking $250k 1st Position Bridge Loan: Low LTV, Will Pay High
The Short Version:
I’m sitting on a truly exceptional land investment just north of Seattle that I purchased in 2010. It is right on the verge of paying off with an incredible profit, but we’re not quite there, yet.
I bought the property on a five year seller DOT that is due to balloon in just a couple of months and the holder is absolutely not willing to grant an extension. But, I need a little more time than that, probably less than a year, to finish wrapping up this deal.
So, I'm looking for a private money 1st position refinance bridge loan of $250k with a very low (29%) LTV on just the raw land value: Basically a DOT swap of old for new. If I can get the timing and terms that I need, I'm not too worried about costs.
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My particular real estate investment strategy, which only works in Snohomish county, WA, is probably something that you’ve never heard of. So, some backstory explanation is in order to detail the value of the collateral and how I’ll repay:
This land is a unique and high-profile 600,000’ commercial ag-zoned site that’s ultra-conveniently located just one minute from downtown Everett, WA, and 30 minutes north of Seattle / Bellevue.
Thanks to a couple of recent changes in county land use regulations, which I had been anticipating for years, the value of this property has gone up by a huge amount: The land alone is now worth $853,000 in breakup value ($1.37 a foot), plus it contains another $6.7 million in Transferable Development Rights credits. Not bad for something for which I paid less than $250,000.
Due to this site being a 1909 “ghost plat” subdivision that was never developed, it is composed of four city blocks with 50 pre-existing legal lots. For many decades, these lots have been “glued” together into one large parcel. Normally, the minimum lot size in this zoning is 10 acres, unless they are preexisting, such as these. Please see the plat map below.
But, thanks to a 2009 grandfathering change in land codes, these lots can now be sold off as rare and high-demand “small denomination farmland” parcels with no further subdivision. The aggregate value of these lots is easily worth at least $853,000. That change was one reason why I bought the property in the first place the following year, plus one more reason. I regularly turn down offers to buy a small piece of land.
I recently began marketing the land in one piece at this price for its highest use: A working agritourism hops farm and craft brewpub development site, right in the heart of the fastest-growing craft beer industry on the planet - North Puget Sound. Visiting is an easy one minute side trip from the busy I-5 freeway, and even faster for the 30 million vehicles that pass by every year adjacent to the 1/4 mile long southern edge of the property.
All things considered, for this use in this location, $853k is an excellent value. This is such a good idea that I’m leaving the possibility of a joint venture on the table.
You’ll find an extensive description of the property and its context etc. in the first few pages of the extensive marketing package that I’ve prepared and posted at https://www.biggerpockets.com/files/user/ChrisNewm...
More importantly, the property also contains $6.7 million worth of Transferable Development Rights credits (304) under the county’s new TDR resource land conservation program. The general intents of this new county program, like all the others, are to preserve green open space and to steer our high population growth, due to Seattle overflow, to the urban areas in the western county.
You’ll find the county flyer on this program here: http://snohomishcountywa.gov/DocumentCenter/Home/V...
But, basically, the program enables the unused residential construction development rights that these lots contain to be split off and transferred to another, and more valuable, location. The extraordinary TDR credit value derives from a “loophole” in the calculations that grants one Sending credit for either every 10 acres of land or for each pre-existing legal lot over 5,000’, just like these.
I’ve already verified with the county’s Senior Planner for this program that this land will qualify for this number of salable TDR credits. So, creating these transferable credits is just a matter of following through.
I knew when I bought the land that this new TDR program was due to be finalized in the near future, even if the final timing was uncertain. But, I saw the same thing happen 15 years ago in King county, our immediate neighbor to the south, when it created its own TDR program. So I knew what to generally expect.
But, a happy surprise is that Snohomish county TDR sending credits are worth four times those of King county credits: Eight-for-one Receiving credits per Sending credit, instead of two-for-one.
As a result, this is the first TDR program, of some 200 in the country, that actually pencils out economically for land investing. At least, with a small fraction of the qualifying properties, like mine, where the value of the credits is higher than the asking price for the land. So, it’s an arbitrage deal, with the future profits automatically locked in at the purchase closing.
However, while the Sending part of the program was finalized in 2013 and these TDR credits are now immediately salable as soon as they are certified by the county, the Receiving part of the program that creates the end-user demand for them is yet to finalize. This last step is due for the final county council vote in less 10 days, on September 30, 2015.
You’ll find the details of this resolution (15-016) at http://snohomishcountywa.gov/2134/Council-Hearings... at the bottom of the page.
This completion of the final element will create a large new high-density multifamily development area that profitably upzones the land density from 22 units/acre to 58. But, to receive this upzoning, it is mandated that developers must first “cash in” an equal number of TDR credits, which are my main real estate investment stock in trade. No credits: No upzone.
You’ll find a short and conservative real-world economic analysis of what these credits do and the significant cost savings to multifamily developers for using them in the new upzone area at https://www.biggerpockets.com/files/user/ChrisNewm...
This analysis is my basis for my valuing this land’s credits at $6.7 million. It has no bearing on this bridge loan’s collateral, but it goes to how much is at stake for me, how I will repay and how much cushion I have to discount the selling price in order to repay the loan on time. The loan is directly well-secured by the value of the land itself, of course.
In order to get these credits certified and salable, I need to do two more things:
1. Do a simple boundary line erasure on some of the smaller lots to qualify them for TDR, which could take a couple of months to complete. 22 of these lots are 3,500’ in size and they need to be turned into 11 at 7,000’.
2. Go through the county TDR credit certification process, which takes about 30 days and costs $1,400. I expect that my ongoing credit pre-sales efforts will have buyers lined up as soon as the certification is completed in a few months.
No guarantees on the final sale timing, of course, but I’m extremely confident - I‘ve been researching and preparing for this moment for years and I have more than $80,000 of my own skin in this game.
However, by the time that the credits become certified and salable, my DOT will have ballooned and all would be lost.
So, with all this on the line and the clock running out, I need a $250k bridge loan to buy some more time to finish the process, plus loan costs to be paid during the closing and am willing to pay handsomely for it. This will cover everything, plus about $10k to cover several months of living expenses to allow me to focus full time on the county processes and lining up credit buyers.
The primary collateral will be a first-position lien on the otherwise unencumbered real property. The LTV for the land alone is 29%. The TDR credits are extra financial cushion. We had an environmental report done for the property a few years ago and it came back clean.
The lender will also need to sign a release for the TDR portion of the land's collateral value, but not the land itself. This is a county requirement. If possible, I'll arrange for this during the escrowed closing for the new DOT.
I’m looking for a one year bridge loan with no monthly payments, with full payback of principal and interest as soon as the credits are sold. I’ll pay a minimum of one year’s interest, even if I pay it off sooner. Just for some extra safety cushion, I’d like an option for a second year with terms to be agreed that will motivate me to pay it off sooner.
(In case the land sells before the TDR credits, it will likely be on seller contract terms, with 1/3 ($287k) down and the lender will receive their full capital back at closing. The interest portion of the loan will be paid as soon as I can get some credits sold, with the first funds earmarked for this payment. There is a legal mechanism by which to secure these "clipped off" credits, which will be recorded numbered certificates, as collateral that can be included in the DOT terms.)
Closing for the DOT swap will preferably happen through Chicago Title, which has local branches all over the US. CT was the escrow agent on the original purchase and they have copies of all the original documents. I'll pay the documentation and escrow costs.
And, no, I will not pay any upfront fees - I’m already all-in on this property, with 5 years and $80,000 invested. The lender will also need to already have a solid positive reputation on Bigger Pockets.
Alternatively, I'm open to some type of JV with a local investor.
Please PM me with what you want for costs, timing and terms, as well as further questions. I’ll choose the best overall offer for my needs.
Thanks!