Key terms may include such items as the percentage of ownership interest, identification of partners, targeted returns including preferred interest rates, cash-on-cash returns, and internal rates of return.
Our equity partner is willing to finance up to 75% of our development costs at a 6.5% preferred interest rate. He will play a major role in our construction and development decisions. In exchange, he wants the managing partners to carry the costs of land acquisition, and wait to be paid our development fee until permanent financing has been secured. He has invited us to propose a back-end split that would be reasonable for us on both operating and long-term proceeds.
His equity position will cover 75% of out-of-pocket construction and development costs, or roughly an investment of $4.25M. The balance of the funds needed would be paid by the Community Development Fund, with equity contributions by me and my partner for the land purchase and for our development fee deferral.
We may agree to his terms with the following order of payment on the investment proceeds after stabilization and permanent financing (anticipated three years from today's date):
1)Payment of principal on loan made by equity partner
2)Payment of principal balance owed to Rainier Valley Community Development Fund
3)Payment of principal balance owed to Land Seller
4)Payment of development fee: $300,000 (estimated payment date of July 1, 2017, increased at 6.5% annually)
5)Payment of 6.5% preferred interest on loan made by equity partner
6)Split of proceeds as agreed by ownership interest
Of course, everything is negotiable, and this is just an example. We will be meeting with our attorney to go over all the specifics of our term sheet with this equity partner.
Happy Investing!
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