NJ Future Forum 2012 Dealing With Reality Vallone

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Today’s political and legal realities have made the use of eminent domain a non-starter in most communities in New Jersey. To help move projects forward in this climate, developers and municipalities alike should consider new, creative approaches toward risk allocation with regard to development and property acquisition that focus on the economic development potential of the site and ways to include the property owners more directly, including structured seller financing and joint ventures.

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NJ Future Forum 2012 Dealing With Reality Vallone

  1. 1. New Jersey Future Redevelopment ForumDealing with Reality: A New Approach to Property Acquisition Without Eminent Domain: Using Structured Seller Financing and Joint Ventures with Public or Private Land Owners George Vallone – President The Hoboken Brownstone Company 1520 Willow Avenue Hoboken, New Jersey 07030 GVallone@HBrownstone.com 201-792-3814 www.HBrownstone.com
  2. 2. 1. A full joint venture  Single asset LLC  Time adjust the selling price with an accrual rate on the value of the land contribution  Negotiate a profit share percentage for the land contribution equity  Seller gives developer time to mitigate risk before the land is contributed
  3. 3. 2. A sale contract with Seller unsecured Junior financing  Seller earns a much higher interest rate.  Purchase money note (PMN) is subordinated to the construction lender’s (and any other secured debt) on the property.  The PMN takes the place of the Mezz layer in the capital stack.  Unsecured Mezz rates are 16% to 20%+.
  4. 4. 3. A sale contract with Seller secured Junior financing  Purchase money note and mortgage (PMN & 2nd M) is subordinated to the construction lender’s first lien on the property.  The PMM may take the place of the Mezz layer in the capital stack.  Secured Mezz rates are 12% to 16%.
  5. 5. 4. A sale contract with Seller senior secured mortgage financing.  A senior (first) secured Purchase money note and mortgage (PMN & 1st M) not subordinated to the construction lender’s or any other lien on the property.  Essentially a bridge loan because it will have to be paid off before construction financing can be placed.  The developer may still need to place a Mezz layer in the capital stack.  A senior secured mortgage rate today would be in the 6% to 10% range.
  6. 6. 5. A sale contract with a phased take down  Like an installment sale.  Seller holds full title for the remaining, un-purchased, parcels.  Developer must obtain a sub-division approval – could trigger need for more variances.  Seller has property with increased value that’s fully approved - therefore it can be sold in pieces.  Partial take down pricing can be time adjustment for each phase.
  7. 7. 6. Option to purchase the entirety  Developer controls property and therefore can obtain entitlements.  Seller has to pay taxes, insurance, cut the weeds, the fence, security issues.  Developer can walk away only forfeiting option fee(s) and entitlement costs.
  8. 8. 7. Option to purchase in phases (combines benefits of #5 and #6).
  9. 9. 8. Sale contract with extended time to close with contingencies at a fixed price.  Contract of Sale usually requires an at risk deposit larger than an option fee  Contract of Sale can have an annualized increase in price to cover inflation.  Developer controls property and has time to obtain entitlements  Seller has to pay taxes, insurance, cut the weeds, the fence  Developer can sometimes walk away (Seller may sue for specific performance) forfeiting the larger deposit and entitlement costs
  10. 10. 9. Sale contract with extended time to close with contingencies and a formula sale price  A great tool to convince the seller to do long term contract with the buyer  The formula sale price pays a Fixed cost per unit times the number of units approved so neither party loses
  11. 11. 10. Sale Contract with a “Responsible Party” who prefers to remediate itself prior to transfer of title.  Contract of Sale needs to deal with extent to which RP will have continuing liability, and limitation of liability of Buyer for environmental contamination not caused by Buyer.  Developer controls property for purposes of obtaining entitlements, obtaining land use approvals.  Buyer and Seller resolve who will pay ongoing costs of property such as taxes, insurance, maintenance, pending closing.  Developer can walk away if remediation is not undertaken as per Seller’s commitment (Buyer may sue for specific performance).  Price to be resolved based on how each of these issue is to be resolved, and in light of passage of time before closing.
  12. 12. 11. All cash, no contingencies, quick close contract.  Used in instances where the value of the property is great and Seller is inflexible.  The best thing to do is to get Seller to accept a large non-refundable deposit, sign the contract immediately, and close as soon as title is clear.

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