Exit Strategies in a Condo Plat vs 2-4 Unit Multifamily

Steve Olson:

We've got this big fourplex project in Phoenix that we've been getting ready to start construction on early next year. And I got the news from our development team that, um, this, this is hotly debated as to how this happened. 

Stay tuned, but apparently, the city isn't going to let us plat this as fourplexes anymore, or maybe they never were. We don't know. And this means that we must start all over with a new subdivision plan. It's going to take at least a year, and nobody wants to do that. This thing is queued up and ready to go. 

We've got clients ready to buy it. The solution is to record this final plat as a condo plat, right? This means the HOA over the entire property is going to be the owner of the ground. The owners of the properties themselves still have fee simple condo real estate. They can sell. Quote unquote townhome, but they don't own the ground. 

It's kind of silly because it says, well, that means you can't knock over and build something new because you don't own the ground. It's a townhome project. You were never going to knock it over anyway. But unfortunately, that limits exit. Would you, would one of you elaborate on how that exit gets limited

Sherida Zenger:

Mainly by the financing. I know we talked about how this project's going to work. It's being built at. Income-producing. They're all rentals. And if you want to go again, Fannie Freddie conventional financing, I, the lender's not going to lend on that because you must have 50%. It must be owner-occupied. And that's not going to be our project. 

So, this project then takes a little bit of a turn because we have to go commercial, excuse me. So do commercial loans on this or cash that doesn’t hurt this project too bad because we are in an opportunity zone. And those people that wanted to take advantage of that can take advantage of that. 

They'd have to use commercial financing anyway, but it changes up who you're going to sell to and limits it, where some of our other projects you've been able to sell to owner-occupied or sell to somebody, you know, that can use conventional financing where this one is going to be strictly commercial or cash? 

Steve Olson:

If you record it as a condo, and everybody that bought it has to use commercial financing. 

When Bob, the investor wants to exit per the title of our episode, occasionally we'd like to remind ourselves what we're supposed to be talking about, but when he goes to exit the person that buys it from him, either it must have cash or commercial financing. It's kind of like the grocery store. You go in there and say, Hey, I want to buy this loaf of bread. 

Can I pay you with a visa, MasterCard? They said, well, we only take Americans. You're still going to sell it, but you did limit the amount of liquidity, the number of buyers for the product. So, what you build, is it CLI or sometimes legally, in this case, put, potentially limit your exit strategies.