(NOTE: What it's like to write a $1,000,000 check for a sweet piece of undervalued real estate … even if your bank account is overdrawn and you owe the local lawn boy $20? This special report shows you step-by-step.)
Hey Moguls, Sean Carpenter back again with more awesome info about the little-known field of government funding, which I happen to specialize in.
In my two terrific previous lessons on this topic, I talked about how closing with public dollars can be a game changer, and how to find those public dollars right in your back yard. Check those out if you missed ‘em.
So, now that you’ve gotten the basics about government funding I bet that you’ve decided that you want to run after the billions of dollars in free money available to us real estate investors on an annual basis.
To do this you are going to:
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Research
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Find
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Apply
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Spend
Very simple, but if you are not careful, it could become complicated.
This lesson will show you the value of free money available from municipal, state and federal agencies, but also caution you on the potential pitfalls that could hamper your efforts. Take a moment and think about your deals for a second; think about how much you need to get going… and let’s get started.
The Gap Is Widening
You have a wonderful deal – let’s say it’s a 4-family dilapidated building just outside a downtown center. The project is located on a brand new light rail system, in a semi-blossoming neighborhood. The deal is a million dollars and you have $750,000. The City has offered you $125,000 in affordable-housing trust funds, leaving you a gap of $125,000…
Show me the Fine Print
Most cities are going to require you to sign a Regulatory Agreement when you receive the funds. In this case, let’s assume that the funds are being loaned to the property at 0% interest for 40 years. In 15 years, the note is forgiven. Until then, no principal or interest payments are needed. (BTW, these terms have been used in actual deals.)
The Regulatory Agreement comes with a caveat. All 4 units must be leased to residents at or above 80% of the Area Media Income (AMI). (Commonly referred to as the moderate income tier.) This is common and may also include a clause that prevents you from selling the property for several years without triggering a prepayment penalty.
Back to the Deal…
So, let’s remember, you need another $125,000 and your friends and family are tapped out. You start looking around some grant sites and realize there is a funding from the State that could get you the remaining money to fill that gap.
The State issued a HOME Request For Proposals (RFP), which will provide you up to $250,000 in funding. Unit requirements include a mandatory low-income requirement. (Units must be leased to those at or below 50% of the AMI.) As you will note, these funds would directly conflict with funds already received from the Affordable Housing Trust.
What Do I Do?
With all this free money flying round, what do I do? These types of scenarios play out all the time in this industry. In this scenario you’ve got two choices:
1. You could go for the $250K (not guaranteed) and turn back in the original award.
Or
2. You could negotiate a change in terms in the already-approved funds to match the existing.
In our office when we structure deals, we leave everything on the table.
You can’t get something you don’t ask for!
Go after all of the funds and work backwards once received. Potentially you could get more funds than you need and have to pay yourself a developer fee. Or perhaps, you get exactly what you need. At the end of the day, the most important piece is to know what you are signing up for…
Read the requirements, and the fine print, but know that everything is negotiable!
Look for funding in your backyard – State, municipal, and federal governments are providing real estate funds on a regular basis.
Read the fine print to make sure you’re in line with program requirements.
Pay yourself a developer fee for meeting programmatic goals.
Sean Carpenter
is the President and Chief Executive Officer of Shamrock Development Associates, Inc., Government Deal Funding, LLC and all of its affiliated companies. Shamrock is a full scale development, consulting, public relations, corporate marketing, and asset/ property management firm. His knowledge of public programs has brought him to teaching opportunities to share his insight throughout the United States.