Real Estate Development Finance

by Daniel
(Daniel in Trinidad)

Hello Colm,

I have finished reading your E-book on land subdivision as this was the aspect of Real Estate Development that I had the most interest in.

I must say the book is the best thing I have found regarding Real Estate Development and it is all the knowledge and sound advice one will need to get into this industry, literally step by step all the way through.

Like yourself , I got my start in Real Estate working as an agent. I had a lot of success selling residential lots of lands for new housing developments and gated communities, however, I wanted more than just to be an agent, I wanted to sell my own development.

I reside in Trinidad and Tobago, the most southern islands in the Caribbean chain, there is a vast demand for land and housing developments for the low to middle income socio-economic class and I have earmarked a site with great potential for subdivision.

This site has already been granted Development Approvals by the respective authorities .

The problem I am encountering thus far is that the financial institutions in my country are not very flexible and do not cater for Real Estate Development Loans.

They mainly focus on mainstream commercial loans such as mortgages, construction loans etc.

Furthermore, at this current time I am fully dedicated to beginning my career as a Development Manager and have no other source of income.

This is a problem with any financial institution that does not capitalize the interest to be repaid in full at the end of the project.

They want monthly payments or periodical payments, which will be difficult for me to qualify for without some sort of income.

My question is, what other suggestions can you give regarding raising the necessary finance for my first project?

Private investors, if so, how best to structure it, JV with profit sharing, or simply a financial loan with repayment including interest at a specified date (end of project).

How about international corporations and investors looking to finance real estate projects on a global scale, any suggestions ?

Your reply will be greatly appreciated as I value your experience and advice tremendously.

Regards,
Daniel
28 yr old Aspiring Development Manager

Hello Daniel,

My first comment is that you express your questions in a wonderfully specific development way - clearly you know what the business is all about and have studied my material.

Let me cut to the chase.

Youre 'timing' is wrong having regard to the World's economic climate as of today, Monday 12 December 2011.

In the financial scheme of things, the world you and I are living in, is going through the biggest change you and I will ever experience in our lifetimes.

The Banks in your Region do not lend to existing developers as they are trying to survive and so you have no chance.

So that means you have to find a private individual who can fund a subdivision from his/her own finances and not have to borrow.

If you can just 'stand aside' for a moment, from your desire for funding and ask yourself 'Why?'

Why are Banks not lending and imposing conditions that I have told you are not acceptable to you or me for development?

They answer is they are telling you "Don't Borrow."

They are in fact 'screaming at you' - "Don't borrow - We Don't think this is a time to Borrow and that is why we are putting such stringent conditions on any consideration for an applicant.

Don't think, which most new developers do - "It's Me; I'm not good enough; my credit rating is not high enough,"

Rubbish! Banks make money by lending and they vary their conditions of making a loan having regard to the economic climate.

Please look at it this way for the rest of your development life.

When the market returns and good time return and your country's Banks maintain their bad conditions I sugest you go to another country where conditions are more conducive to a developer's needs.

Hope this helps,

Colm Dillon

realestatedevelopmentcoach.com







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by: Anonymous

Hello Colm,

Thanks for the quick and concise response. I have decided to pursue financing from the Private Investor route, any suggestions how I should structure this arrangement?

Should it be a Joint Venture with profit sharing, or simply structure it the same way the bank would for a Real Estate Development Loan, with interest being capitalised and repaid with principle at the end of the project?

In your experience what works out best?

Thanks again,
Daniel

Hi Daniel,

I still stand by my earlier comments and add the following; I have only ever done one JV in my career.

I would only consider a JV between equals. That is you both have the same amount to lose and both contribute to the deal.

I don't mean that you both have the same expertise. For example you have real estate and some development experience and he/she has say legal or accounting experience.

In a JV I would not do any work until an formal JV Agreement was signed by both of you setting out clearly what both of your duties are in the deal; how to resolve disputes and many other things.

If the other party puts up all the money, then let's be clear - 'you are working for him or her' irrespective of what the agreement is called, because if the deal goes bad, the the bank goes after him or her and after that they go for you.

Most people will borrow, so don't think they have a few million under the bed. Sorry about that but I have to be clear.

My best suggestion however is to package up the deal and present it to a potential target client and your offer is to act as the development advisor on the basis of a fee of say 2.5% to 5% of total development costs and a profit share of 15% on completion of the net profit.

All of the above comments are made on the basis that my first email reply is my preferred position.

Bye,

Colm Dillon

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