Today my Van Gogh business partner and I met with Joel Andersen, the owner of Andersen Construction Company, our builder for Van Gogh Lofts on South Henderson Street in Seattle. The purpose of the meeting was to go over the construction bid on the project. Construction costs are estimated to be anywhere between $4.1 to $4.8 million dollars. Andersen is trying to get those costs reduced, whether that is by providing structural support other than with pilings, or shortening corridors, or just getting better bids from sub-contractors.
Joel Andersen also suggested an option to keep the Seller in the deal as an equity partner. This has benefits when it comes to getting bank financing. We are assuming a bank loan at 65% LTV, and a loan from the community development fund at 25% LTV. That leaves us 10% to raise, but we also receive credit for the cost of the land.
Joel Andersen has literally developed or seen hundreds of proforma budgets in the course of his work. His company was hired by Vulcan to do the redevelopment of Yesler Terrace, and they have been doing projects in both Portland and Seattle for the past sixty years. He seemed surprised that I was using the rental figure of $1.50/sf for rental rates on our project. He felt confident that new construction in Rainier Beach should be able to pull in at least $2/sf. He quickly calculated the numbers on a proforma budget for our 34-unit 28,500sf building.
He estimated operating costs at $500/unit/month, but recognized that property tax exemption would be a big benefit in reducing our costs on this project. He included a 5% development fee for Van Gogh Development Corporation, and 5% estimated cost for architectural fees. He calculated the cash-on-cash return for investors to be around 18%. With our projected net operating income and a conservative cap rate of 6.5% for Rainier Beach, he estimated that the value of our completed building would be somewhere in the neighborhood of $9 million. That represents a significant upside to our project.
He will be sending us an updated proforma budget, and much can change during the course of development. But numbers look pretty good now for a profitable project. Stay tuned!
Happy Investing!
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