First ground-up. Trying to understand what I'm actually signing up for

They die at the cost estimate, mostly. Entitlements kill you slowly and you can see it coming. A bad number in your pro forma kills you after you've spent $200k on drawings and can't unspend it.

The specific version: you underwrite hard costs off a broker's rule of thumb, say $190/sf. You get real subcontractor pricing eight months later and it's $228. Now the project doesn't work and you've got dead soft costs and a land contract you have to close on. That's the classic small developer death.

Get a real estimator on the concept drawings before you spend on construction documents. It costs a few thousand and it's the cheapest money in the whole deal.

On your question 3, replacement cost. That's the actual argument right now and it cuts against you. If existing product is trading below what it costs to build, you build a new building worth less than you spent the day you finish. The only ways out of that are a market where rents are genuinely rising, a site nobody else can get, or a cost basis nobody else can hit.

Which of those three do you have? If it's none, the answer is buy existing and wait.

I'm new so mostly reading, but the draw thing confused me for weeks and maybe it helps to say it plain. The construction loan doesn't hand you $2.8M. You spend your own money first on the early stuff, then the lender inspects and reimburses in pieces, and there's usually a holdback until completion. So the cash you need at any given moment is more than the equity number suggests.

@rigging has the practical version and it's the part that sinks people who came from renovation. Lenders also typically require equity to go in first, all of it, before the loan funds a dollar. So on a $4M project you're spending $1.3M of your own before you see a draw.

Also, retainage. The GC holds back 5 to 10 percent from subs and the lender holds back from you, and everybody is short on cash at the same moment near the end. That's when scope creep bites, because the change orders land right when there's no liquidity left to absorb them.

On the equity gap, the mechanism most people use is a syndicate or a joint venture, which means you take money from other people to fill the difference. The moment you do that you're likely in securities territory and the structure has to be set up by a securities attorney. That's not a formality, it's the difference between a deal and a problem. One sentence on that and I'll stop.

What I'd actually read before anything else is the construction loan term sheet. Look for the completion guarantee, the recourse burn-off conditions, the interest reserve size, and whether the lender can call a default on failure to meet a lease-up milestone. That last clause is where a slow lease-up turns into a lender taking the building.

Honest question back at you @bramble, why development? You've got $400k and a partner. That buys a stabilized 8 to 12 unit building in plenty of markets with cash flow starting month one. Development gives you three years of negative carry and a personal guarantee.

I ask because I went through the same list-building phase and realized I was drawn to development because it sounded like the real thing, not because the returns were better for my size.

@kestrel that's fair but there's a real answer to it. Existing buildings at this size compete against every buyer with a checkbook. A site with a zoning problem that you can solve competes against almost nobody. The value you create in development is mostly created at entitlement, before a single shovel moves.

@bramble, if your site is already zoned by right for 14 units then you're buying at a price that reflects that, and your margin has to come from construction execution, which is a much harder place to find it.

Nobody has said anything about lease-up so I will. A 16 unit building delivering into a submarket that just absorbed 400 new units is going to give away two months free and take six to nine months to fill. Your lender's pro forma probably assumes 15 units a month absorption and three months to stabilize.

Budget for the real one. That gap is an interest reserve problem and interest reserves run out.

Coming from the build side, the number I'd challenge is your 14 to 18 month construction schedule. On wood frame small multifamily that's roughly right if permits are clean and the site has no surprises. Utility connections are the thing that blows it. I've seen a transformer lead time push a delivery by five months and there is nothing you can do about it except wait.

Ask the utility for a written service availability letter during your feasibility period. It's free and it's the single most useful piece of paper you can get before you commit.

What actually happens if the project just doesn't work halfway through? Like the numbers stop working at month ten and you can't finish. Does the lender take a half-built building? Do you keep paying? I've never seen anyone describe that outcome in plain terms and it seems like the thing @bramble should know before signing.

@compass I wondered the same. From what I've read it comes down to the lender foreclosing on a partially complete asset, which is worth far less than the money in it, and then going after the guarantee for the difference. So the answer to "what happens" is mostly "you find out what your guarantee actually said."

@bramble, the thing I took from this whole thread is that your four questions are really one question, which is whether you have enough capital to survive being wrong once.