ARTICLE 1 of 4
Today is the kickoff of a series of articles for 2021 addressing the concerns families or property owners should consider when contributing their land or a large cash investment in a real estate development.
The genesis for this series came about when Laura and I were discussing “war stories” from our years of working in the real estate development world. I was reminded of working with a family many years ago who had put their primary asset into a development project in downtown Auburn. They had contributed the land and building that had housed the family business for almost 100 years. While they owned a few commercial properties, they were new to development. The developer, who was fairly new to development himself, had a grand idea for the first revitalization project for the City. Unfortunately, things didn’t turn out well.
And “…to make matters worse the family had financed other properties to raise money for this new investment…”
Almost everything went wrong from the start. The project concept was flawed (it included an indoor water park), the developer was struggling with other projects, he did not line up all the required capital before starting this project, he failed to execute the development, he used a succession of hard-money loans, and used money from this project to fund other projects. And to make matters worse the family had financed other properties to raise money that was then invested in the project.
I started working with the family when they were being asked to contribute yet more capital to the project. While they were not real estate experts they knew something was not right. I came in to assess the situation by reviewing the project, its financing, and the developer and then advise them on next steps. Unfortunately, it was too late. It didn’t take long to uncover the troubles outlined above plus the fact that the lender was starting foreclosure.
In the end, the lender took the building and the family sued the developer, winning a substantial court judgement for his malfeasance. However, he fled the country and to date the family has not recovered anything.
Our goal with these articles is to help other families and investors avoid this disastrous outcome!
While hindsight is always 20/20, families can set themselves up for better outcomes by understanding the development game, the risks, the players involved, and having appropriate guidance from outside experts.
During our careers in commercial development, Laura and I have worked with several families who already had or were contemplating investing with developers. Most of those stories turned out well. A couple, not so well. Most families are novices at what to consider, look for, or what questions to ask before writing the check or signing the deed to launch a commercial development. Often, they have wise counsel to help them.
In a continued series, we aim to educate our readers about real estate development with a particular focus on family investment and participation. Topics covered will include common pitfalls, why invest your land or cash with a developer, getting to know the developer, an overview of the development process, risks inherent in development, and other topics you should consider. Oh, and how to tell a “sure thing” from a real flyer.
These articles are written in conjunction with Laura Bachman. Laura is a long time real estate professional in the Greater Seattle Area. Her work centers on taking properties through the design, permitting and construction phases of development on behalf of both private property owners and for commercial developers. Laura brings both an attention to detail as well as a background in finance to each building she brings to life. The extensive list of projects she has worked on can be found at: www.bachman-group.com.