Exit Strategies In A New-Build Multifamily DevelopmentNov 13, 2021
We can transition then and we can look at going. We can look at going bigger. You're going to do a big project, maybe a partnership or a syndicated. Where we have multiple investors, you are, what's called the general partner. You're driving the ship and there's a whole bunch of things you have to do with the sec in order to make this legal.
We're not telling you what you should or shouldn't do there. Talk to your attorney about that. But when we talk about exiting syndication, the traditional model is we bought an asset. It might be an apartment complex. That's really old and run down, or it might be land, an apartment complex on, or a bunch of homes.
Right. And then we go through construction, we get a certificate of occupancy, which means it's done. We then lease it up and upon lease-up. We've got some, a couple of direct. That we can go, right? It's fully leased. You have taken all the risk out of the balloon at this point.
There are big investors out there, life CO's and REITs and people like that that are going to pay a top dollar a fancy way to say that as a compressed cap rate, right, they're willing to pay a lot of money because you took all the risk out of it.
And that's your exit strategy. And that whole process is probably going to take you three to five years at some. But the kind of along the point of what we talked about with chase earlier, what if you don't want to do that? What if everybody in your partnership is willing to stay in longer instead of selling let's refinance, right?
A mentor of mine used to say refi till you die. There's no taxable. You pull the money out. You take advantage of that, and you're good. If you didn't refi over, you know, to the hilt.
Now, the good news on commercial financing is they won't let you refi to the hilt. There must be what's called a good, debt service coverage ratio there, which that's a fancy way of saying there's more than enough money coming in to cover your debt and that, and then some, so you can sell it, you can refi it.
Something that we've started to see a little bit more of, and I'd love your comments.
You could sell before CBO technically put it under contract if you're using our model because our buyers carrying the construction loan? You can sell that or put it under contract, and then once it has CFO, you can close on that unless it's a cash buyer and they want to take that out.
But yeah, there are absolutely people that will take it on and assume that risk of getting that tenant. Because they know that it's a good deal when I'm doing a deal right now in Provo that's like that. And there doesn't seem to be any problem with it. So yeah, I mean, it's a way for the investor to get some of their gains out of it.
And then 1031 exchange. Maybe they want to buy one or two other properties with it, 10 31 into it. Or maybe they just did it to make a little bit of cash. They're going to pay taxes on it. And they're okay with that.
I have a call with two institutional investors tomorrow, both of which are interested in buying C of O's. I think what that's a symptom of is the volatile construction environment, right? The cost of the land, the cost of the dirt, a C of O is something that's relatively quantifiable. Here's how much it costs, and they can manage their own risk from there. But they're just not willing to take on the construction risk, which is getting to be more and more every single day.
If the microphones were on before this podcast, you would have heard us ranting about that because we're getting clobbered. And in Idaho right now, construction risk.
I think you're able to sell at a little bit lower of a cap rate at that point. I think some of those investors are going to come in, be willing to take a lower cap rate, knowing the risk is out. Well most of it is.
But that's the big money like you talked about before, the bigger projects that you take on and you finished and stable. Or if you're selling off the CFL, they're willing to come in and buy more because that's the big money. And the big money is okay with buying a lower cap rate.
I have my brother, his father-in-law, (I'll keep the details fuzzy because I didn't get their permission), but he works for a state government pension, and they buy big pieces of commercial real estate and multi-family properties. And they'll, they'll pay top dollar. I mean, they underwrite it like crazy, but when you're talking about managing billions of dollars in a pension, right, and you want to place that money and earn a few percent a year on your money to them, that's great.
They want low drama. They want a return on their money. They got to keep those billions of dollars working. So that's an entirely different problem than somebody who's flipping out of their Airbnb house that they were built in Scottsdale.