Financing Question/Investment Opportunity

[Understudy]

The company that I work for is having a difficult time right now with the current lending market coming up with some cash to fund our residential construction. We're a local builder in the NW Tucson area which took over a subdivision from a national builder almost exactly one year ago and have been doing pretty well in that time period with sales considering the market. We've been funding the entire construction during that period with the company's own finances, but a recent surge in sales and lack of cash buyers in these sales providing draws finds us in a tight spot to get them all started at once.

We're basically looking for a bank/someone to put up a $250k - $500k line of credit which we could pull from to fund this construction. They're very willing to pay 10% interest on this and would offer up the deed to the lot, plus additional collateral. The other positive side is the construction of these homes is a short timeline of 3 1/2 - 4 1/2 months so risk exposure period and investment return is quite quick. One of the owner's does manage a trust which could fund these but would prefer to find other opportunities to eliminate any conflict of interest. This trust money could be an additional protection to the investor though because if we happened to have a home sale fall out (which knock on wood hasn't happened in the last year at all) we could tap this money after 60 days to purchase the home outright, thereby limiting the investors risk substantially if the need arose. Right now we're trying to track down some private money as this seems to be the best opportunity to get something done.

Any advice on where to find funds right now outside of Arizona banks which are staying 100% away from any real estate/construction loans or is anyone looking for a solid investment opportunity? I know the Prime community is quite savvy or there may be someone looking for an investment like this or know someone else who might be. If I had this kind of cash on hand I would jump all over it. If anyone would be personally interested I can provide more detail via PM and get you in touch with the owners as this really is a solid opportunity.

 

[Sig]

10% interest on the entire line or just the $ amount drawn from the line?

What is the expected life span of this LOC?

How many houses still need to be constructed?

What are the details of the development to include current 3rd party appraised value of land and structure?

At first blush, to a private investor... this will most likely look like too much risk and not enough upside. At the end of the day, it comes to relative risk for a given reward. Right now, private investors can get fairly high-quality corporate bonds that yield near 10% interest while exposing themsleves to far less risk than what is involved with new development construction. Perhaps there are more details that make the offer more appealing... or maybe I am just missing something.

As an aside, a 250k-500k LOC seems rather small to handle the needs of a developer building a whole community.

 

[Understudy]

The 10% would be on the amount drawn likely but I'm sure that a good portion would be used most of the time. It's also likely that a minimum constant withdrawl could be established in order to guarantee a return to the investor.

Not 100% sure of what term they'd want on this LOC but likely in the 2 year range.

There are 8 homes currently under construction with another 4 in backlog yet to be started right now and an additional 83 lots to sell.

Much of the details could come from the owners of course but the value of each lot is about $45k in itself, with the base price of homes from $213,490 - $259,990. Individual finished home appraisals have been from that low end up to $300k.

You're correct in that this isn't a huge amount of money for a builder to construct a development, but all the infrastructure is in place already and with the company providing much of the cash already to finance a portion of the home construction they're looking at simply needing some additional funds for high demand times such as what we've seen recently. One of the reasons they've been fine to this point is a number of the sold/closed homes were cash deals with the buyers providing a draw to fund the construction themselves for a slight incentive and the relatively minimial build time allows for decent cash flow. However, the snag became recently when we sold about 7 homes in a five week period that weren't cash deals and with the homes under construction not closing soon enough to allow us to fully fund these backlog homes yet to be started.

All of these homes under construction are pre-sold, no specs are being built and with the track record we have of closing 100% of built homes and also have an assurance of purchasing a home outright should one fall through I don't see a lot of risk for a decent return. I'm not the one who would be fully putting this deal into place of course, but my knowledge of the area, the company, and the collateral they have makes me feel very comfortable with this being low risk. Perhaps the 10% doesn't seem like a large enough return for construction related project, but I think someone who was presented with the whole scope of the project and deal would feel it was a good return relative to the risk.

The website for the subdivision should anyone want to check it out is www.TorrenoVistoso.com

Thanks for the reply!