In a heated real estate market like New York’s, with multiple buyers vying to snap up development sites, the fastest bidder to offer a down payment is usually the one that lands the deal. But developers often have resources and dollars tied up in other deals. What’s more, aggressive builders are looking to close on more deals these days than their liquidity allows — yet still maintain tight control over a project.
In many cases, a developer does have the cash on hand to proceed, or has equity partners at the ready. A Midtown South-based company, however, has devised a product for cash-squeezed builders that enables them to more quickly line up funding to secure a deal.
The firm, Winchester Equities — headed by Avi Benamu and Jack Hazan — is offering to fund a soft deposit on a property through a short-term contract. Under the arrangement, Winchester reviews a project, then the buyer signs a contract with the seller using a company controlled by Winchester. At the same time, the buyer and Winchester execute an option agreement, giving the buyer the right to take over the company from Winchester at a specific price and move forward with the seller. The soft deposit is refundable, and gives the developer some time to secure debt and equity for the project.
Winchester charges clients fees for providing the funds. The first is about 2 percent to 2.5 percent of the soft deposit amount to first draft the option agreement, and then 5 percent to exercise the option, but only if the buyer decides to proceed.
This is similar to a short-term bridge loan, insiders said, but instead of the buyer on the hook for the hard-money loan, here the buyer has greater flexibility.
Investor Dovi Lesches, a principal with Empire Equities, was not familiar with this product, but said it falls into a niche normally filled by hard-money lenders.
Such loans “are a common thing for either startup developers or owners or developers that are just spread too thin. They turn to hard money,” Lesches said.
Hazan underscored that they are not making a loan.
“We are not lending money, that is why we don’t require collateral. The contract is the collateral,” Hazan said. “[The buyer] is paying me a fee for the option to buy the company. And what does the company own? The contract.”
Developer Charles Everhardt of Lockwood Property Holdings used the service to make soft deposits on two Miami projects and is now trying to tie up a 99-year ground lease for a project in Manhattan.
For one project in Miami, Everhardt put up $1 million through Winchester to make a deposit on a lot at 3711 NE Second Avenue, that had a purchase price of $14.5 million. (He did not ultimately close on the deal.)
“Sometimes earnest money is $1 million, sometimes $5 million and sometimes more,” Everhardt said. “It is much easier for me to control the deal myself — and write the check for the cost [of the Winchester deposit] and while it is under contract to put together the financing.”
Everhardt says without the soft deposit, he becomes more beholden to his partners who give him money to lock in a deal. “What Winchester enables me to do for a fee is I can have this money available and get complete control over the purchase agreement and contract instead of compromising,” he said.
While distinct from the recent crowd funding craze, this program is similar in that it allows someone to participate in a deal where they would otherwise not be able to. In this instance, a developer would not be able to tie a deal up in contract at acceptable terms without the money, and with crowd funding, a small time investor would likely not be able to invest in real estate development at all.
Locally active crowdfunding sites include Fundrise, Realty Mogul, Prodigy Network, and Sharestates which help small and even micro investors get into the real estate development game.
Other real estate companies are creating funds by targeting particular communities or neighborhoods, such as CityShares.