First time developer - Down Payment
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[{"id": "fb7p6ui", "text": "Sounds like you have a long way to go before jumping into something that complicated.  Even with a solid plan and team, you'll need to have access to cash to fund 20-50% of the project.  Generally you'll spend money on your due diligence, design and land acquisition, then get financing for the construction.  It's certainly possible to recoup your upfront costs and down payment through the incentive programs, but that would be well into the project.", "replies": [{"id": "fb802hv", "text": "I would handle the due diligence and design myself and then require financing for the land acquisition and development.", "replies": [{"id": "fb8blmi", "text": "No lender is going to finance that fyi. You need an equity partner.\n\nAlso, that is a very small project. Have you done some financial analysis to see if this project will make a return? Also, have you talked with brokers about the project to see the appetite for tenants in the area you are building? And the lease rates for the area?\n\nI love your ambition, but set yourself for success!", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fb7r74d", "text": "I can't imagine a scenario where a first time developer who doesn't 'have the 20% for a development of this size' could negotiate such a thing.\n\nThat being said, it would help if you told us where this is. There could be local assistance programs available.", "replies": [{"id": "fb80na3", "text": "I understand the risk from their stand point.  That\u2019s why I was wondering about the opportunity and assistant programs.\n\nSpecifically this area is in Martin City district in the greater Kansas City, MO area.\n\nhttps://edckc.s3.amazonaws.com/EDC%20Website/Opportunity%20Zone%20Maps/Martin%20City.pdf", "replies": [{"id": "fb87heb", "text": "Interesting!\nI see in another comment you plan to hold. I would look into new market tax credits and the project's eligibility. That would create enough tax credit equity for a down payment.", "replies": [{"id": "fb8sot7", "text": "Yes. The overall goal would pretty much be to hold forever pending everything in life goes somewhat normal. Then hand over to kids.\n\nDo you personally have any experience using tax credit equity as a down payment mechanism?", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fb7rj6z", "text": "What is the dollar amount for the development? You can hire brokers to help you find the equity needed for a project like this. However, anyone who would be your sole equity here will be looking for a strong track record of experience in similar deals. \n\nAlso, 20% would be the minimum you would need to put down. Being over-levered, above 70% LTC, is generally riskier on a development project with no in place cash flow. If something goes wrong in construction or lease up, you could get yourself into a lot of trouble at 80% leverage. \n\nMy recommendation would be to look for cheaper bank financing at \\~65% leverage. Then work to raise money from \"friends and family\" where they contribute about 80% of the equity required (i.e. 80% of the 35% leftover after your bank debt). You would then put up 20% of the equity required of your own money as \"skin in the game.\" The friends and family would be treated as limited partners with no ownership or voting rights and you would give them a basic waterfall structure and pref as a return. \n\nLastly, I would make sure you are VERY versed in opportunity zones. The only reason this is a real incentive is if you hold it for 10 years and can take advantage of the tax incentives. If you sell before that time period you get almost 0 incentives.", "replies": [{"id": "fb80g94", "text": "I haven\u2019t ruled out the option of taking on other investment to carry the down payment. Just would prefer not to if that would complicate things.\n\nThis area (Kansas City, MO) has a pretty good economic group meant to assist with everything from these opportunity zones to TIFs. \n\nThe plan would be to hold for a very long time and create a personal portfolio of revenue generating properties.  Just the situation in this circumstance would be better suited for a larger development than a single home.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fb8o0y4", "text": "You're better off finding a partner with money to pay the down payment and ride the investment with you than trying to get the bank to reduce the amount of equity you put in the project. The amount of equity in the deal is a direct correlation to the quality of the loan you will get. with a no-equity loan, or 100% LTC, you will have trouble finding any banks interested in lending to you, and those that are willing will have extremely onerous recourse terms and very high interest, and will be rooting for you to fail so they can take over your project.", "replies": [], "depth": 1}, {"id": "fb90vsj", "text": "Typical development loans top out at around 65% of total project cost. You need to bring a partner or recruit a group of investors to provide equity equal to 35% of the project cost.", "replies": [], "depth": 1}, {"id": "fcjuhaw", "text": "Agree with everything here, sounds like you have no to minimal track record and hundreds of things can go wrong during a build. With high leverage debt your margin for error is small. On top of this we are top of the cycle so the market may go down on you during construction making your original pro forma harder to achieve. \n\nI have many clients in KC but for your goals there are many many many real estate alternatives for passive cash flowing properties that will appreciate over time with fractions of the risk of ground up construction. If your horizon is actually generational then buying some thing that was just recently built or a freshly leased STNL building will give you up to 20 years of good stable cash flow. \n\nEven for an experienced builder banks typically want to keep their leverage below 65% -70% of Cost (Cost = Land + Hard cost + Soft cost) or a real basic way of thinking is 50% of the Land vale and 100% of Hard Costs.", "replies": [], "depth": 1}]