Equity partners. How to find and how much to offer???

[morty]

Hi Guys,

Didn't know where to post this but hopefully i can get a few opinions.
Not trying to sell anything, just want advice.

I own a dev site with full DA for 6 townhouses in Melb. Pretty sought after spot, great city views, you get the picture. Valued at around $2.8m on completion.

I've owned this in a company for quite a few yrs and i currently owe $400k on it, it's worth around $800-900k. I've paid out a lot for architects, engineers, you name it but have finally got it to building permit stage with just a few wks (i'm told) till it's issued.

Now the stickler as you all know is the banks. I realise it is the worst time ever for a budding developer to try and borrow $1.5- $1.7m for his biggest dev yet. Trying to avoid pre-sales at least for the next 6 months.

But it looks like westpac will come to the party if i almost own the land.

I've got about $150k in available equity that i'm in the process of refinancing to pump off the loan. Which would mean i need to privately borrow $250k to pay out the loan and i'm away.

What would be the best way to source this private finance? Door knock solicitors, well known local businessmen? and what would be a fair return on someones money for this???

Please don't tell me it's impossible cos i know it's not. Pick holes in my ideas and constructively criticise the s!$!t out of me but could someone please help me with ideas?

Thanks heaps and sorry to be long winded.

Morty

 

[Qlds007]

Morty

Wont tell you it is impossible but you have a big ask as you are offering a lender a second mortgage behind Westpac.

Whilst Mez Finance is still just available the risk to the lender means the rate iis extremely high and of course Westpac will need to consent to the registered charge.

Secondly might not find that your Mez lender likes the fact that Westpac will want 100% of net sales to reduce their loan as the project takes place and this means they will only pick up the crumbs at the very end.

I wish you luck but i dont think it is achievable.

An alternative would be to look at using a GR lender who would advance the total amount under a first mortgage.

 

[morty]

Thanks Richard for your honesty. I thought i might be up against it.

So how do i go about finding a GR lender is it the big four banks or am i better off looking at more specialised lenders??

Thanks again
Morty

 

[grossreal]

hi
as the name says I know a bit of thistype of lending and gr lenders in the big four is just not there unless you hae at least 10% of the project to throwin and have 50% presales.
the market for constrcution is not the same today as say 3 months ago and the gr lenders just are not there at the 75 or 80% grv lending.you will need to look at you second lender and they are getting short and far between
and you will need to sharper your pencil and need at least 25 to 30% margin to get them looking at it at this stage.
sorry to say that if looking for grv lending you will need to have the above to get it thru

 

[morty]

Thanks grossreal for your feedback.

So let's say the deal will stack up and it's a goer. Where/who specifically do i need to be going and talking to?

I'm in the process of getting all the quotes back so i don't know the exact margins quite yet but i'm close and need to find a lender specific to this kind of deal pretty soon.

Thanks again
Morty

 

[grossreal]

hi
there is a lot of cash in the market at the moment and its basically floating around looking for a place to call home and its not going into development sites.
if I was wanting a major to do the deal and the numbers were right anz or cba would be my best bet at the moment.
but you will need to be wearing a bullet proof vest and be willing to give away everything including a second mortgage on your underpants.
I have a few lenders that are still in the market but they will only go in as a form of jv and for me they are really taking big chunks out of profit.
but thats the market.
I am not into developments at the moment
I am in buying distressed stock as the margin is higher then building it.
as for your question.
how much we give 25 to 30% for an equity partner
and how to find them
very hard in this market as alot have had there equity position reduced.
you are looking at people to get involved in a development where the return is 25% and if its less it would just not be worth doing
and we are buying at 70% of val finished all over red rover
you do the numbers
it is a very tough market and is not for a while going to get better
so for me I would not at this stage be pulling out the hard hat donning the boots and calling in the crane not unless you know of a lender out there that is chomping at the bit to go into development funding.
I know of a few chomping on the bit.
but they are in the electric chair waiting for the switch to be thrown

 

[Minx]

Can you get investors into it? builder my partner is working for at the moment has a joint venture with personal investors for this one site only who chip in with finance and have no involvement in the construction. He returns the money once sold with a % of profits also. He does well as he pays himself 120k as the builder and gets the bigger slice of profits for this one.
I know for a fact that this builder makes roughly 300k a year.
Can you get cashed up investors in??? Family? Friends?
The builders that i know do so well coz they are a) old (as in 50's 60's) b) have the experience c) do this all day every day d) cashed up. A majority of their finance is cash money therefore no crazy holding costs.

 

[morty]

Hey Minx,

That's exactly what i had in mind! I guess your friend asks around and then gets a certain amount of people to put in for a % return. I guess it would have to be a pretty decent %, any idea of the amount?

I'm really up against it cos i'm pretty inexperienced in the banks eyes, (32 yrs old and although been in the building trade for 15 yrs only a registered builder for 2). I've built about a dozen houses in the last 2 yrs and completed 2 small sub-divisions so i'm putting together a full list of previous projects and gonna put my best foot forward.

So now if i can also ask does your builder friend get contracts drawn up for all his private investors through a solicitor?

Thanks for your help
Morty

 

[RightValue]

Why not consider a staged development?.

Put in your $150k, borrow another $150k from the bank against the value of the land only and then build the first two units. When they are sold, repeat the process or take the sales contracts to the bank (if you sell them under construction) and borrow some more and keep going.

If they are as good as you say they are then they should sell easily enough. If not then you can halt things until they sell with much lower holding costs and risk.

If people are put off by settling the first couple before the others are built due to noise/mess etc then offer to rent them out for the first year at 5% or so yield from settlement, which is effectively the same as borrowing the money at 5% interest.

just a thought,

RightValue

 

[Minx]

Hey Minx,

That's exactly what i had in mind! I guess your friend asks around and then gets a certain amount of people to put in for a % return. I guess it would have to be a pretty decent %, any idea of the amount?

I'm really up against it cos i'm pretty inexperienced in the banks eyes, (32 yrs old and although been in the building trade for 15 yrs only a registered builder for 2). I've built about a dozen houses in the last 2 yrs and completed 2 small sub-divisions so i'm putting together a full list of previous projects and gonna put my best foot forward.

So now if i can also ask does your builder friend get contracts drawn up for all his private investors through a solicitor?

Thanks for your help
Morty

Morty the people that this builder uses are his friends and they are all from the same ethnic group. I have no idea if he uses lawyers or not, he didn't tell and I didn't ask. I also don't know the % amount either. My partner and I arn't ready to go down this road yet so I didn't ask. He has been doing this for a long long time. At the moment he has 2 sites of 3 t/houses on the go in the same street. I know that one site is all his and the other is partly financed by his friends. Both sites are to be sold for 4 mill so thats big $$. I can see why he has one site as his own and the other with investors as to reduce his risks and have more cash flow for the projects. He did tell me that for the 2008 projects he will make at least 500k. We shall see what the figure will be now with the economic downturn.

Cash is king Morty. You would need to approach family or friends coz no offense but I don't know you, so I wouldn't put my money in your project. You will struggle to find strangers who today will do so.

My partner has similar experience as you. He is still on the tools also as he is 29. We don't build for clients unless they are friends or family. We will be doing a similar project at the end of next year however we have access to cash investors (our parents) as well as our savings as well as substantial equity so that's not a problem. The best part about having our parents in as cash investors is that they will not accept a return (except for the initial outlay). Any profits made we intend to re invest in the next project thus giving us a higher profit margin, with the 5-7 year goal of being able to purchase the land cash and having finance for the construction only.