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First hurdle encountered

by Chad Ludeman on November 20, 2007 · 11 comments

in Development,financing

Since this is a blog about every detail of the project I guess that means we need to share the good with the bad or the successes with the challenges. I’ve been told that development is mostly about coming up with a good idea and then overcoming a bunch of challenges to ultimately end with a successful project. So here is our first challenge. Maybe it’s the second if you consider it took us 9 months to find lots that fit the requirements for our project.

I called the local bank that I had chosen to check on the progress of the construction loan to find out that they were no longer interested in financing our project. This was the bank that we chose after interviewing many financial institutions to find one that met our criteria. One that offered reasonable loans, is local and looking to invest in small companies using “triple bottom line” accounting to benefit the environment and community in addition to the financial bottom line. I was happy with my choice and had been assured that they were excited about the project and everything looked great on paper and all we needed were formal approvals from the “higher-ups.”

The main reason given was that the bank did not believe we could build a house for $100K (and the other for slightly more) and that they were sure we would go over budget like many of the other developers they have chosen to finance recently. I was upset to say the least, politely argued a couple of points, realized I was getting nowhere and decided to begin looking elsewhere for funding.

So we are now looking at other lenders and remaining optimistic. I am confident we will find someone truly interested in the uniqueness of the project and the benefits that differentiation will make to it. One that will look at the overall quality of the team we have assembled rather than just the numbers.

I am personally putting everything I have behind this project and am determined to get it done one way or the other. I had a few moments of doubt last night but I am back to full spirit today and ready to tackle this hurdle and the next one that is behind it. Hopefully there will be a valuable lesson documented at the conclusion of each of our hurdles overcome along the way to help others trying to do the same thing somewhere else.

If you enjoyed reading this post I can promise you'll love our new writing over at Postgreen Homes. Yeah, we know that's the same thing your favorite band said and their new album is nowhere near as good as their early stuff, but seriously, we are actually still getting better.

There also isn't much conversation to be had here . . . at least not with us. So come on over to the Postgreen Homes Blog and tell us what you think of our new(ish) digs and crazy ideas. We will be sure to tell you what we think of your opinion.

{ 11 comments… read them below or add one }

1 e November 20, 2007 at 8:54 pm

That was my first thought after reading about this on the Jetson Green blog. How is it possible to build a home of this size and with these features in any East Coast city for $100k? Not saying it’s impossible, and God I hope you guys can pull it off. Lots of folks are watching, including a few here in DC.

2 lavardera November 20, 2007 at 10:52 pm

Are they willing to finance 150k? If you come in less then pay down the loan with the remaining budget.

3 chad November 20, 2007 at 11:21 pm

I like the way you are thinking but there is a balance between loan amount and what the properties will appraise for. In other words my LTV can not be too high.

In reference to if it can be done we obviously feel it’s possible or we wouldn’t be trying. Construction costs are certainly related to location and I think Philly is well below DC or NYC now.

The reason I think we all don’t see it happen more often I’d that there is no financial incentive for the team. We could all make more $$ doing a more status quo project. It’s not often that a developer, architect and builder happen to meet that are all willing to consider let alone follow through with such a low margin project.

I could be way off in this theory so feel free to disagree.

4 lavardera November 21, 2007 at 2:55 am

No, you are right – its not the status quo approach. But I see it as being far looking. Not only for its environmental value, but as a business model. There are a lot of cleared lots in Philadelphia, and a lot of moderate income citizens. Coming up with an approach to deliver housing that more people could afford has opportunity for growth. Its a plan that would provide as much benefit as it would profit, just as you’ve conceived it to be.

5 chad November 21, 2007 at 5:37 am

Thanks Greg. Let’s hope you’re right. I don’t mean to sound like we’re the only ones trying to make modern and green affordable. There are others across the country doing similar projects, yourself included. I plan to spend some time putting together a post of those that are doing similar projects soon.

6 Preston November 21, 2007 at 6:28 am

Sorry to hear the bad news on that lender … you know, you might think about naming the bank so other green developers know what to expect in dealing with them.

Otherwise, a project like this might be well intended for a angel investor/partner with like values. Maybe someone that understands the plan and will be flexible throughout. I’m going to keep my mind on this over Thanksgiving and see if I come up with any thoughts.

7 chad November 21, 2007 at 2:13 pm

Thanks Preston. I don’t want to make it look like I’m blatantly bad mouthing people or other businesses so I’ll refrain from naming names. This is a learning experience for us and everyone monitoring the project so I do think it’s important to discuss, just not attack…

I am talking to three other lenders who are all interested in the project now and I am confident that one of them will be a good fit. It’s a tough time of the year with the holidays to move things along quickly but I hope to have a good idea of the financing situation for the project at the end of next week.

I have thought of Angel investors as well, which I’m sure would work but may sacrifice the already thin bottom line a bit too much.

8 Stanford Gable November 26, 2007 at 4:12 pm

Chad, I have been formulating an idea for “green” communities along the city public transportation routes. The idea is on a Penn Praxis scale of redevelopment. I have started to enlist others in the brainstorming and wondered if you might be interested in sharing your thoughts. Maybe your plans could be part of a much larger goal considering the global environmental movement. This comment has little to do with the financial issues addressed in this thread. Just putting the idea on the table.

9 Russell Wild November 27, 2007 at 5:46 pm

Good luck getting over this stumbling block. You can do it. Its hard finding a bank with vision. But safe and normal are boring.
Add met to your list of those doing similar projects. I have property and plan to build in the next year. Sharing our ideas and hurdles will help us all. Good luck.
Russell

10 Barbara Bryan December 4, 2007 at 5:47 am

While this source is funding 15 unit developments, maybe it is worth proposing as a prototype for affordable urban infill. Good luck.

http://www.greencommunitiesonline.org/tools/funding/loans/

11 chad December 5, 2007 at 4:43 am

Great link Barbara, thanks! I signed up for their newsletter to keep tabs on them as they may be a good fit for the next, hopefully larger project.

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