Profile picture for user5874543

What are potential risks to lending the equity from my land to another investor?

An investor has come to me asking to use the equity from land I own. I own this land free and clear and the investor is going to get a 12-24 month construction loan. At the end of this time frame the lien is removed from my land and I will be paid a fee for lending the equity.

What are the potential risks of losing this land if something falls through with his construction loan?
I am new to development, Is this a common practice in larger developments?
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May 05 2013 - US
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Profile picture for SoCal Engr
Curious...what protections do you get for your risk (in case things go south)? Or, is the developer playing a game of "I bet your life"?
 
A "small developer" I bought a house from lost 1/2 of his development (in early construction) to a hard-money lender when he fell behind schedule and the bank wouldn't lend him any more money. (BTW...it was not his first build, and it wasn't the first time he fell behind schedule on the build). From my admittedly limited experience, "things going south" is not an uncommon occurrence. What separate the "pro's" from the "wanna-be's" is their anticipation of and response to any southern migrations.
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May 05 2013
Profile picture for user5874543
thanks


Thank you for the advice.  I trust the developer and the deal he is putting together.  I will ook for all the guidelines you talked about here. 

So this is something you have seen investors do before?

Michael,  the land has zero cash flow and will not sale at this point.  This will give me a chance to get into another deal with some cash flow.
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May 05 2013
Profile picture for user5874543
thanks douglas,


Thank you for the advice.  I trust the developer and the deal he is putting together.  I will ook for all the guidelines you talked about here. 

So this is something you have seen investors do before?

Michael,  the land has zero cash flow and will not sale at this point.  This will give me a chance to get into another deal with some cash flow. 
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May 05 2013
As stated below, the risk is you loose the land, and maybe even litigated for any short falls. I am the curious type, Why would you want to do this?





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May 05 2013
Your risk is that you could lose your land.

From your description it appears that the construction is on another parcel of land, not yours where you would subordinate to the construction loan. In this case it appears that the investor's lender does not have enough equity for the construction loan and seeks cash or equity in something they are willing to use as additional collateral or for an abundance of caution. 

Then comes the question of the construction loan. Is it residential, commercial, land development or a combination thereof. The ultimate liquidity of the construction project would be a key factor in my decision if I were in your situation. 

What legal document does the investor propose to use to collateralize your property for his loan? Do you get a junior lien on his construction project as consideration for using your equity in addition to any fee? And if so, are you prepared to foreclose and pay off the construction loan should things fail? These are all questions I would be asking and would want resolved prior to such an arrangement. 

My advice is to get a good real estate attorney since this type of transaction is not generally covered in state approved real estate contracts. I have been in the development business for many years and would not enter into such an arrangement without a solid attorney drawn contract that would protect my equity should something not work as planned. 
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May 05 2013
 
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