Balancing Risk and Return in a Residential Real Estate Development

One of the most important services our firm offers is structuring real estate investments to manage risk and still provide an attractive return. Properly managing risk and enhancing return requires the expertise in complex transactions that Prime Properties offers.

A residential real estate broker came to us with a family-owned parcel of land that was the last remaining piece of the family farm. Years before, this farm had been part of a failed development. However, since this was a prime parcel, many developers offered to purchase it.

The experts at Prime Properties recognized that, in order to pay maximum value for the land, a developer would need assurance that the local jurisdiction would allow the proposed residential real estate development. Significant money would be required for legal fees, engineering, surveys and feasibility studies. Experience showed that very few developers would pay improvement value for a parcel where approval for development was not assured.

A Solution to Satisfy Both Parties

Here is the solution Prime Properties crafted to meet the needs of both parties:

• The client/developer would buy two-thirds of the property for a nominal amount, enough to pay closing costs; the sellers would retain one-third of the property.
• The developer would improve all of the property and provide a performance bond, insuring the development of the property with all streets, utilities, and fees paid.
• The seller would have a 2^nd trust deed with a reversion covenant if the developer did not complete the project within a given time-frame. Since the developer ‘owned’ the real property, he was able to get a construction loan for 100% of all costs, including the performance bond.

Creativity Manages Risk and Offers the Client a Tax Benefit

By not conveying all of the property to the developer, each of the eight siblings retained three finished lots, worth more than the cash equivalent of raw land value. Also, from a tax perspective, they were eligible for an IRC 1031 exchange. More importantly, by not selling all of the property, having a performance bond and a reversion covenant, the sellers were protected in the transaction.

Because he was able to finance 100% of all costs, the developer enhanced profitability by 50%, and did not have any direct costs until after the residential real estate development project was completed.

Our client trusted Prime Properties to protect his interests while still generating an attractive return in a very complex transaction. Let the experts at Prime Properties experience in managing risk and enhancing return help you help you realize the potential in your investment properties.