Private Equity Raise In Exchange for Ownership in a 84 Unit 55+ Apartment Community

1 Reply

Ok BP Team,

Looking for some high level advice on a deal my partner and I are looking at.  I have had some experience raising private equity money to fund real estate projects in the past.  Mostly development and sales of condos.  Looking to transition to ownership stakes to create long term passive income.

THE DETAILS:

There are 4 owners looking for $1 Million to help fund the build out of a 84 unit 55+ apartment community outside of Albany NY in exchange for 35% ownership in the project.  They are in a bit of distress as they tried to make the project condo sales and the sales were slower than they estimated so they are converting to apartments.

The bank needs a personal guarantee from my partner and I and the $1 Million in equity will be used for the following:

$500,000 Construction Equity (Lender)

$150,000 Marketing Lease Up Cost

$350,000 Land Loan Buyout

The owners have a GMP contract with a Trinity Construction and Management Corp in Mass who will be bonded and there is a $500K contingency.

There is a lender with a term sheet for the construction financing with great terms.  They did the site visit last week, I will have the updated term sheet this week.

24 Month Build Out and Lease Up.  They already have 8 units built including the model units so we can begin leasing now.  The pro forma is using 3.5 unit per month absorption rate.

I have had a 3rd party market study completed on the area and they estimate a strong demand for these units at 4-6 units per month and good growing demographic in the area of ages 55-74.

OK HERE IS WHAT WE HAVE NEGOTIATED:

At 24 Months Stabilization we refi and payback $500K of our original investment, so we still have $500K left in the deal.

3 Months Later take out permanent loan with non recourse permanent loan. (HUD?)

35% Ownership represents $132,370 in cash flow.....

Basically we are making 26% on our money still in the deal and if there is ever a sale we have negotiated 20% of profit.

MY CONERNS:

 My personal guarantee on the project.  The bank is going to need our balance sheets to do the construction loan and that's what makes me nervous.  Any ideas on how to limit this?

I also would like an appraiser to help me understand the valuation they have put together for the equity payback schedule.  I want to make sure that at refi we have the dollars to take out and payback our investors.  I would be happy to pay someone for their time to review this with me....

I have attached links to the Equity Investment Use and ProForma sheets we are using to evaluate the deal.

Any help would be greatly appreciated!

Thanks

Kris