[moved] Investing with Developers

“some even offer up to 70%p/a. But the average is about 30%”

Be very wary of any developer offering an annual return of 70 percent. Even 30 percent is not common and can be indicative of significant risk on the investors part, an inexperienced developer, or a scam.

There are a number of channels available for sourcing capital for the “preliminary phase” of a property development – SFH or larger, for far less than 30 percent.

If the developer is offering ~30 percent to finance the “construction phase”, then I would bet my last dollar that the project is not deemed viable or the developer does not have enough credibility with institutional lenders to secure finance.

“what is the legalities of a JV or promisary note.”

The legality issues should be directed to a qualified lawyer – every agreement and/or note is structured differently.

“Promisary note. Is this piece of paper worth what it says or just the paper it’s written on?”

A promissory note [also referred to as a “note”] is a legally binding document and the basis of many large and small loan transactions. But a note is not a guarantee that you will see a return on your investment.

“JV’s appear to be more secure, does anyone know the in’s and out’s? What to look out for, what you must have in it?”

In general participating as a “joint venture partner” requires a significant investment in proportion to the required funds.

Although at times joint ventures are structured as syndicates whereby smaller investors can participate – retaining “units” i.e. shares, in the joint venture.

But this method often reflects the developer/JV’s inability to secure sophisticated investors and should be approached with caution.

From an experienced developer/fund raiser’s perspective the objective is always to limit the number of investors to as few as possible.

Furthermore, any entity raising funds must typically comply with securities requirements – which your lawyer will advise on.

— Michael

Brendon, I’ve spoken to a few ‘experienced’ developers, and the reason they would offer 30% is because if they borrow the money from you and don’t have to use as much of their own, then their profit is less on that deal, but they could be doing more than one development at once, thus making more profit.

I believe that using their own equity is the most expensive money they can use….

Miracle, a really good solicitor to talk to in regards to lending to developers is Bernard Tan, who works for Maddocks Lawyers in Sydney. If you have the money, he can also bring deals of his clients to you – we were just pipped on one super deal cos some of my syndicate couldn’t decide quicky enough[thumbsdownanim

Cheers
Mel

True Mel

What we’re talking about then is a JV scenario as apposed to Mez finance.

The difference lies in the security provided for the funds invested.

The problem I have is that they are advertising as Mez funds with great returns etc. And my concern there is that a novice investor may easily get burned by not being able to ascertain the security provided.

The company in question here in Brisbane offers these great returns and as security provides director’s personal guarentees. On looking more into it we discovered that they had offered the same guarentees on about 5 other projects.

And do you think the director’s will have much in their names?

I think there are going to be a few people burned in the coming months.

Brendon

Hi guys – the company that I worked for in my last position offered JV opportunities that are returning between 32% and 65%. There was nothing dodgy about it and your security was guaranteed as you owned a proportion of the freehold property.The borrowing for the project was secured by using that unencumbered property. It’s not a bad return for not having to do any work. If you do a developemnt in your own right you may get 100% return on your funds invested but you need to find the project that works and have the confidence in yourself that what you are about to undertake will be successful (and find a financier with the same confidence!) and have all the headaches and so on. JV’s can put you into a much larger deal taht you just couldnt undertake yourself.

John – 0419 198 856

“the company that I worked for in my last position offered JV opportunities that are returning between 32% and 65%.”

Which company and what were the terms?

“your security was guaranteed as you owned a proportion of the freehold property.”

Investment 101 – “guarantees” are nothing more than a marketing ploy. Developers who use this ploy will generally have contingencies to protect their interest if the project fails – if not, they should have.

“The borrowing for the project was secured by using that unencumbered property.”

If the LOC is “secured” with freehold property, and the project is viable, then a primary and/or secondary lender will generally finance the deal at a cost of up to ~12-15 percent p.a. – counteracting the need for private funds or a joint venture.

— Michael

SFH = Single Family Home

People might have seen this article, but I’ll post it anyway.

http://www.jenman.com.au/NewsArticles1.php?id=100

There’s some other articles on Jenman.com.au on mezzanine finance. Just type “mezzanine” into his search website and they come up. Does anyone have any comments on the article? I am sure developers would be more interested in commenting on the article rather than on Jenman…

Of particular interest to me from that article is this comment:

“It sounds enticing but the risks are high. If a project goes belly-up the mezzanine investors get paid only if there’s anything left over after the banks get paid.”

Thoughts on this, miracle? Peter? Props? Mel? Brendon? Michael? Anyone?

kay henry

Can someone please fill me in on the following hypothetical situation.

Lets say I lend someone 200k on a 1M prop, and are given a second mortgage on it. I would also assume I would have a caveat taken out over the property?

Lets say the developer goes belly up and the banks want to sell. My understanding (which may be entirely wrong, so feel free to correct me), is that the bank will have trouble selling the property to anyone other than myself, as I have a 2nd mortgage and a caveat over it.

Or, am I mistaken in that the bank could sell it to an unrelated party for say 700grand at a mortgagee auction?

Hiya wrappack,

Michael is pretty much right, but I thought I’d give you the sellup process in a nutshell, if that’s OK?

If the mortgagee defaults, the mortgagor may (after some legal paper shuffling) offer the proeprty for sale. The property has to be put up for public auction, and there will be a reserve which will usually be set by a valuer.

Once the reserve (which is always reasonable…) is reached, the property will be sold.

The moneys are disbursed thus:

Firstly, to the First Mortgage, in the amount of the mortgage, plus due interest, plus legal (and other) fees.

Secondly, Any other mortgages, in order, in the amount of those mortgages, plus their due interest, plus fees.

Thirdly, any other parties who may legally claim under the property.

Fourthly, the mortgagor. (IF there is any money left!)

So, for example, if the property has a first mortgage of 800k and a second mortgage of 200k, and sells at auction for 1.3m (lets suppose some 50k of work has been done by Mr Backhoe) then the money would be distributed thus:
First Mortgage, 800k + interest + costs (say 820k)
Second Mortgage, 200 + int + costs (say 210k)
Mr Backhoe, amound due + costs (say 55k)
TOTAL: 1.038k
So the Mortgagor will get: 262k to walk away with.

BUT

Say the auction only brings 950k…

First mortgagee gets 820k.
Second morgagee gets the balance (130k)
Mr Backhoe goes under. (no pun intended)
Mortgagor gets nothing.

I hope this is sorta clear. [blink]

Devgal

OOps, almost forgot to ask.

If I buy a house for say 1M, and the vendor will lend me 100k, would he get a 2nd mortgage/caveat/joint venture/etc?