Fident Capital has secured $24MM of project financing for the acquisition, entitlement, and development of an infill townhome project in the village area of La Jolla, California. The 32,139 square foot site covers two parcels with existing commercial buildings and tenants whose leases expire at the end of the expected 12 months entitlement process.
Financing was provided by a $1B national opportunity fund singularly focused on residential housing in growth markets. The fund capitalized 100% of the project costs with zero equity investment from the developer. The developer will earn a market-rate development fee plus profit participation as performance hurdles are cleared; the final tier of the waterfall allows the developer to earn 30% of profit.
This project held numerous challenges. First, the developer had been adversely impacted by the downturn. The top-flight operator’s capital constraints made providing a meaningful equity co-investment and recourse guarantees for debt financing challenging. Second, the unentitled land, subject to coastal commission oversight, presents potentially significant obstacles to the development timeline. Third, the project’s existing tenants held extension rights or powers of eminent domain which made the groundbreaking uncertain. Finally, rapid price recovery in the Village made validating pro forma values against apples-to-apples recent comparables impossible; there is no direct comp.
Fident immediately understood that the operational track record of the developer and the “A” real estate might allow equity investors to overlook the critical items of co-investment and guarantees on highly accretive recourse debt financing. By working with the more entrepreneurial partners within their network, Fident sourced an investor who supported a fee development approach to the deal.
The developer’s stellar track record in coastal La Jolla, and their affiliation with top entitlement counsel, proved invaluable for illuminating the entitlement challenges and pitfalls to be avoided; the involved parties agreed that the project’s entitlement risks were manageable. The selling brokers and legal counsel were able to mitigate the risks of lease renewals and eminent domain by securing a costly lease buy-out prior to close. Finally, Fident’s thorough, organic research and analysis illuminated the reasonableness of pro forma sales pricing. The pro forma returns also provided some reward for the project’s risks.