Posted by ray@lcorn on December 17, 1999 at 15:50:47:
Bert,
I can assure you that that kind of deal is pretty standard across the country. Local governments here in Virginia and North Carolina routinely put out RFP’s (Request for Proposal) for developers to supply space. Developers and lenders alike love the deals because there is a fully amortizing loan with a matching term lease with a government tenant, usually in the form of a local IDA (Industrial Development Authority) which in most cases (Orange County CA and NYC aside) are credit tenants because the governmental body guarantees the lease, and governments have tax and bonding power. It is usual to use the lease as collateral for 98-100% financing. The initial ROI is often infinite because of the leverage.
Most developers then sell the property (even before completion of construction) and usually make a tidy developer’s fee of about 10% or more on the sale. Valuations range from 7.5% to 9% cap rates (very high)
It’s a highly specialized niche market that they sell to… mostly institutional, insurance and pension fund buyers. Crittenden Newsletters (Novato CA) puts out a contact newsletter expressly directed to these deals and the people that do them. These deals can also be a very good fit for downleg properties on large 1031 deals where the investors are looking for triple net, low cash flow deals. In fact, there is a sub-market for what is known as a “zero-flow” deals that purposely have no or slightly negative cash flow.
Got your wheels spinning? All you need to jump in is the site and a contractor! It doesn’t take money… but it does take contacts and credit, and usually someone involved with prior experience. Its the same principle as a single family L/O or a land contract, just on a larger scale.
ray