Many projects come across our desk for consultation. Some are easy to consider, while others are even easier to reject.
This example on Shelter Island caught our attention and like professional puzzle solvers, we started with the corners, and worked our way towards the middle.
Here’s the gathering of the puzzle pieces:
Four (4) half acre lots in a quiet section of Shelter Island at a great sales price of $325k per lot or $1,300,000 for the entire subdivision.
Another part of this puzzle is that the Shelter Island market doesn’t offer a lot of new or modern home product. There appears to be pent up demand. What we mean by that is there are still a lot of bargains “On the Rock”, but most of these so called bargains are dated and in need of a complete makeover, gut renovation, or in many cases are simply tear downs. Doing the math on land values, pre-existing properties and their rehab budget needs, again helps to support the case for this well priced subdivision.
Upon market review, the homes that tend to sell the best are new, traditional, rich in detail, and offer modern/contemporary interiors with an open floor plan, great outdoor living space, and are roughly 2,500 to 2,800 sq ft.
The builder / designer who brought us the project said he can build for roughly $240 to $265 per sq ft. He’s proposing 4 mix and match traditional style designs that work together in a private carriage house type setting. He can deliver all 4 homes within a 9 month time frame.
He’s proposing to re-sell the homes between $1.49m to $1.595m complete with landscape, vinyl pool and mahogany decks. We’ve checked out the builder and his resume includes more than 25 years of design, build and construction management experience. His current projects include a 6,000 sq ft home on Shelter Island that will be completed within 90 days, and so far his numbers are under the targeted cost of $260 per sq ft.
Lets talk about the financing puzzle piece.
Debt financing can be arranged for this project at 8.5%. The commercial lender in this instance will allow a spec construction loan with the following parameters; They will finance up to 80% of Total Project Costs (Acquisition & Construction), as long as the loan amount is under 65% LTV “Loan-to-Value” after completion. In this example the total project cost is $3,650M, and the end value is estimated at roughly $6,350M…. a 57.5% loan to end value. The financing or carrying costs over 24 months would be deducted from the anticipated profits and are estimated to be $578,525 during the length of the project. Still leaving a great profit for the developer.
Lastly, and probably the most important piece of the puzzle is the Equity component.
The project requires roughly $900,000, or a 20%-25% cash contribution by the partners, builder or joint venture. The equity requirement is the last piece to this puzzle. However, the builder’s funds are committed to other projects, and he finds himself in a predicament many builders who stop by our office find themselves in… short on cash!
Many Spec builders have the option of having their equity funded by 1 or 2 “angels”. These are wealthy individuals or private lenders with an appetitive to invest in luxury, high end residential homes and benefit from the management team’s extensive experience and knowledge regarding real estate.
Oftentimes these angels begin as customers of builders. Impressed by their craftsmanship and experience they decide to partner with that particular builder and fund their next project.
What if you don’t have a angel and you’re undercapitalized? How do you complete this part of the puzzle?
Builder’s who are undercapitalized are tasked with either finding these individuals, pursuing traditional financing sources, or approaching firms like ours to ask for help.
Here are some quick tips for raising capital for your next project.
Q: Should a builder start with the “money,” or go out and seek a development project with the hopes of getting it financed? Answer: It’s always great to have financing lined up so that you know your parameters when analyzing potential projects. This also allows you to pull the trigger quickly when an opportunity arises.
We suggest you start by galvanizing your supporters. Reach out to potential investors in your network, and share with them your business model. Check their temperature, and put together a list prospective investors to return to when you have a project on the table.
Put together an investor presentation. Draft a professional resume and bio that summarizes your career history, and credentials. Be sure to list any notable recognitions, or publications you’ve been featured in. Grab professional photos of previous projects you’ve completed and homes you’ve built, and throw them into the presentation also. Nothing beats visuals when it comes to getting prospective investors caught up to speed with the quality of your work. If you’re not tech savvy, hire someone with design skills to assist you with your presentation. You only have one time to make a first impression. Even more important if you decide to pursue investors or firms who are unfamiliar with you.
Stay active, and always remain on the lookout for new finance sources. Practice makes perfect. If anything, it will help to keep you sharp. There’s a successful, retired CEO of a natural resource company who raised billions of dollars for acquisitions over the course of his 30 year career. He once said the key to his success was meeting with a new banker once a week, whether or not he needed any money.
Hope that helps.
Dan Gualtieri & Noel Roberts.