We Developed a Project at $15.3M That Only Appraised for $10M
Here's what happened:
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You’ve probably never heard of Grafton, North Dakota.
It’s about 3.5 square miles. If you walked in a straight line, you could walk from one end of the town to the other in about an hour.
A stone’s throw from the Canadian border, Grafton had a population of just 4,170 based on the 2020 census.
So we’re developing a $15.3 million project there.
Here’s the story:
Rural communities have a tough time building housing. Not just in North Dakota — but everywhere across the country.
It’s simple, really.
It’s more expensive to build in rural communities and you get less in rents, so people don’t really jump at the opportunity to develop rural projects. The deals just don’t pencil.
But back in February, I got contacted about this opportunity in Grafton. They wanted to convert five acres of cornfields into two 36-unit market-rate apartment buildings.
The town has a couple big employers — most notably American Crystal Sugar and Marvin Windows. Marvin Windows does well over $1 billion in annual revenue, and their plant in Grafton employs more than 500 people.
For companies like American Crystal Sugar and Marvin Windows to continue to grow (along with the farming community hiring H-2A workers), they need places for people to live.
So Grafton needs housing — bad.
And the city was determined to make that happen.
So we went to the City of Grafton…
“OK,” we said. “How do we get this deal done?”
(BTW: If you’re trying to get deals done right now, you should always start with that question.)
The City was committed. To start, they agreed to:
Give us tax increment financing (TIF).
(TIF is a public financing method designed for funding economic development — often in more rural communities. The TIF gave us 13 years without taxes on the project.)
Donate $350,000 of land to the project for free.
Provide $250,000 in the form of a grant.
They pulled out all the stops to make this work.
But that still wasn’t enough…
So the private companies pitched in.
Marvin Windows agreed to:
Invest in the project.
Donate the windows and doors for the project.
Guarantee the rents for 2 years on 40 of the 72 units.
And even with all that…
We still needed more to make the deal work…
So we went to the Bank of North Dakota.
(Fun fact, North Dakota is the only state with a government-owned-and-run bank in the U.S.)
The Bank of North Dakota agreed to contribute 20% of equity in the project.
Their contribution looks like it’s in the form of a loan, but there are no interest payments. Essentially, if we (MAK Capital) and our LP investors sell the properties, the Bank of North Dakota is owed payments back, but if we don’t sell, we aren’t required to pay the note back.
The project will cost $15.3 million to develop, but it only appraised for $10 million. So the $5.3M gap between cost and appraised value obviously made it a challenge to secure financing.
Lenders typically base loans on appraised value rather than total project cost. Since we could only get 50% loan-to-value based on the appraised value, normal financing options would’ve only covered $5 million.
The lesson?
I’m not sure there is a perfect takeaway to this deal story.
On the one hand, you have to ask for things. This deal would not have been possible without the full buy-in and support from everyone — the city, the private companies, and the Bank.
But you also have to ask the right people. It’s a cliche, but real estate really is about “who you know, not what you know”. We knew the right contacts at the Bank to work with in this instance. And if we didn’t, I’m not sure it would’ve been possible to get this deal done.
The bottom line is that rural communities have a really, really tough time building housing. It’s not appealing to most developers and requires a lot of work.
This would’ve been impossible without so many people who did whatever they could to get this project done, including Grafton Mayor Chris West.
Being North Dakota born and raised, I’m excited for the opportunity to help another local community out.
We recently broke ground on the project. Stay tuned for more!
P.S. Interested in talking to me about investing opportunities?
See you next week!
Love this man! Bringing all the peeps to the table.