How to sell backyard to developer and keep front house? Partition? Lease? JV?

San Diego, California
Legal & Legislation
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How to sell backyard to developer and keep front house? Partition? Lease? JV?

JP Leonard
Member since 2021 · 14 posts · 0 votes

Looking for advice from experienced legal minds here 
We own a multi-family zoned lot which we originally bought intending to add a couple units in the back.
Lacking the capital and building experience to develop it ourselves, we want to offer the backyard as a "Developer Special" on the MLS.
We’d rather not risk demolishing our home at the front of the lot. It might not even be worth it at this time. We’d rather not even put it up as collateral on the construction loan.

So far I have a couple ideas how to separate the back yard for sale.
* A “voluntary partition” where buyer and seller agree that each one has exclusive rights to a part of the property. According to https://partition.uslegal.com/voluntary-partitionhttps://par...
“The co-owners may effect voluntary partition in any manner they agree upon. … Usually, a voluntary partition is effected by mutual conveyance or release executed by all owners. A written agreement is valid and need not be formalized by a deed.”
* Some kind of joint venture or common interest development. This could also be a vehicle for other investors to take a share of equity.
* One party owns the entire property and the other has a long leasehold.

(I'm told the lot can't be subdivided because the rear parcel would would need a street frontage, rather than alley access. The new California laws on backyard development, SB9 and AB1033, apply to single family zones and ADUs, not apartments in a multifamily zone. A partition agreement might allow mutual access easements to avoid the appearance of a subdivision.)

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y

    @JP Leonard

    As you mention you cannot subdivide the lot but as a partition agreeement I think that would cause serious heart ache for you to sell later and for whoever owns the back half as well later on.

    Recognize also whether a bank would also lend against this type of deal.

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  • JP Leonard
    OP
    Member since 2021 · 14 posts · 0 votes
    2y

    That's a valid point.
    The partition would be more of a temporary measure, once the back yard is developed the whole property should go into a condominium. 
    Also as you say whether the construction loan is possible this way I'm not too sure.

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  • JP Leonard
    OP
    Member since 2021 · 14 posts · 0 votes
    2y
    Quote from @Chris Seveney:

    @JP Leonard
    Recognize also whether a bank would also lend against this type of deal.

    Basically we didn't want to sell our home now and above all not get it foreclosed on if the contractor fails to perform. Also the added value from developing the lot is more in the vacant part than in the already built portion.
    If we do have to sell the whole parcel, another option could be a performance bond and a lien on the property.
    Looking up pros and cons of performance bonds, this interesting article comes up
    https://www.lauriebrennan.com/blog/to-bond-or-not-to-bond-th... 
    In that case the owner decided to require that the contractor be bondable rather than requiring a bond. 
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  • Joshua GorskyPro Member
    Professional · Freehold, NJ · Member since 2016 · 33 posts · 16 votes
    2y

    @JP Leonard

    What about creating a land condominium? The 2 condos would your front yard and back yard. Each could act with autonomy re: development and financing.

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  • JP Leonard
    OP
    Member since 2021 · 14 posts · 0 votes
    2y

    @Joshua Gorsky

    Yes that might be the way to go. I need to learn more how it works with condos. 
    Apparently 95% of new multifamily construction is rentals now rather than condos due to arbitrary regulations by federal mortgage agencies and how those get intertwined with contractor defect laws https://www.minnpost.com/cityscape/2014/02/where-have-all-co...
    "For condos to be eligible for a Fannie Mae-insured loan, developers must presell 70 percent of their units." 
    Presales could actually be a great way to raise gap funding, but buyers might only want to do this with major builders. I'm planning to reach out to see if people are interested in investing equity in a condo to get it at a discount, maybe at construction cost. 
    Yes, you could have a condominium of just two entities, us with the front yard and an investor for the back.
    There are also tax issues. According to @Jay Hinrichs, the back yard might be a separate S corporation as developer for ordinary taxable gains and the front part a 1031 exchange for capital gains. 
    Valuation is another issue. I'm trying to get a good enough valuation for the land to earn about 30-35% of the units in exchange for the land equity. This could mean asking double the value a developer might pay for a run-down cottage on a large lot. OTOH he wouldn't have to finance the land purchase or the demolition at today's interest rates.

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  • Kristi KandelPro Member
    Developer · Fort Myers Beach, FL · Member since 2018 · 383 posts · 195 votes
    2y
    Quote from @JP Leonard:

    Looking for advice from experienced legal minds here 
    We own a multi-family zoned lot which we originally bought intending to add a couple units in the back.
    Lacking the capital and building experience to develop it ourselves, we want to offer the backyard as a "Developer Special" on the MLS.
    We’d rather not risk demolishing our home at the front of the lot. It might not even be worth it at this time. We’d rather not even put it up as collateral on the construction loan.

    So far I have a couple ideas how to separate the back yard for sale.
    * A “voluntary partition” where buyer and seller agree that each one has exclusive rights to a part of the property. According to https://partition.uslegal.com/voluntary-partitionhttps://par...
    “The co-owners may effect voluntary partition in any manner they agree upon. … Usually, a voluntary partition is effected by mutual conveyance or release executed by all owners. A written agreement is valid and need not be formalized by a deed.”
    * Some kind of joint venture or common interest development. This could also be a vehicle for other investors to take a share of equity.
    * One party owns the entire property and the other has a long leasehold.

    (I'm told the lot can't be subdivided because the rear parcel would would need a street frontage, rather than alley access. The new California laws on backyard development, SB9 and AB1033, apply to single family zones and ADUs, not apartments in a multifamily zone. A partition agreement might allow mutual access easements to avoid the appearance of a subdivision.)


     @jp is your land in SD? Might be worth talking to this group and seeing if they might be interested in a collaboration. 

    https://podcasts.apple.com/us/podcast/the-andrew-hines-real-...

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  • JP Leonard
    OP
    Member since 2021 · 14 posts · 0 votes
    2y

    Thanks, Kristi! Interesting podcast. I will reach out to Shawn.

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