Re: Q&A for Ray: Birddog for architect ! - Posted by ray@lcorn
Posted by ray@lcorn on November 03, 2010 at 17:42:54:
From what you’ve described you’re not a JV candidate for this type of deal.
You’ve got no money to put in the deal, can’t bring financing to the table, and since this is your “start”, it sounds as if you have no experience doing large development projects. There is no “joint” in this venture. Basically you’ll be using his money to finance your education in the riskiest sector of commercial real estate.
As to the deal, your comp/value numbers are likely out-of-date. The 65 cents on the dollar is actually above what raw land with entitlements is selling for in all but a very few markets. Nationwide entitled land prices are averaging 50% LTV, and considerably lower in hard hit areas (e.g. CA, NV, AZ, FL). Depending on what coast you’re on, and the market supply/demand and economic outlook for the area, the beach front may even be a liability. Resort areas are especially hard-hit with a glut of residential supply. There are literally hundreds of entitled land deals on the market. Many will go to foreclosure within the next 12 months.
New development of any kind in this environment is a long-term play. Development financing is almost non-existent without 35%-40% equity so most buyer are those that can afford to “land-bank” the property to await a rebound. To do that it takes the 50% discount from 2007 value to make sense.
A fundamental truth of development is that the best time to buy into a project is at the bottom of the cycle, after someone else has spent the money for entitlements, at a significant discount.
Once market timing is established, the lead time required for design, permitting and costing is 18-months to two years, so the key is to gather data that can point to the local market economic/demographic trends over the next three to five years. That’s what determines absorption rate, and the overall timing of the project.
Over time this may be a lucrative project, but your buyer has to have the staying power–three to five (seven?) years-- to complete the project. Assuming your buyer has that, then you might consider approaching it as a type of paid internship.
Once it’s under construction there are multiple disciplines that have to be in sync. The major functions include architecture, engineering, finance, legal, contractors, sales and marketing, clerical and accounting.
That means the most truly valuable person on the team is the Project Manager. That person selects, instructs, supervises and coordinates all the above noted functions to get and keep the development/investment plan and budget on track. If you have a background that incorporates some or all of the above, such as engineering, accounting, business owner, banking, etc. then that can translate to the needed skill set. I’d suggest you consider offering those services on salary, perhaps with a 10%-20% or so (depends on the relative numbers or absorption, flow of funds, finance curtailments, etc.) equity kicker paid as profits are realized, with perhaps half of the total at the end.
As an aside, this is exactly how I got involved with my first major commercial construction project. It was a mixed-use development of a new hotel, restaurant and office complex in 1989. Back then “hotel” was a toxic term much like “development” is now. We got it done, and today I still own a third of the hotel and restaurant (we sold the offices).
I tell you this to encourage you to not let the above dissuade you from trying. Persistent and extensive preparation are the keys to success in any endeavor, especially true in the RE development business.