F
unding development deals, no matter where you are in
the capital stack or the type of capital you invest, is not an
easy task. So many variables can impact and jeopardize an
investment. An inadequate budget, an inexperienced sponsor/
developer, a miscalculation in timing or how long it will take
to stabilize a project are just a few examples. Even if a savvy
experienced developer with a strong track record, healthy
portfolio and good access to capital knocks on your door, you’re
only halfway there.
"...you have to imagine
everything that can
go wrong and find a
solution for it, before it
ever happens!"
I have dealt with many middle-market developers and in the
last two cycles, had great success originating and managing
through highly structured and complex bridge and ground-up
construction loans across many product types.
TRACK RECORD
The real question goes beyond the obvious, “Toot your horn and
tell me about your successes.” I follow with, “Tell me about your
bumps and bruises.” I ask how the developer did in the previous
cycle (we all remember how unpleasantly it ended) and how the
developer navigated through the downturn. The answers tell a lot
about character, integrity and the type of borrower/partner the
developer will be going forward.
Prior bankruptcies and/or foreclosures, for example, aren’t
necessarily a deterrent to making an investment in the individual
or company. Understanding why these events happened and
how they were handled should always be explored. If the story
is a positive one, more often than not, they make for a stronger
sponsor. Everyone learns from adversity.
THE BUSINESS PLAN
Developers are dreamers, visionaries and creative types. They
see something that others don’t see and turn a piece of dirt
or dilapidated warehouse, for example, into a vibrant place of
business bustling with people, noise and the good kind of traffic.
Doing that is a huge undertaking. No development project ever
goes smoothly.
Never mind that the market work has been done, the pro forma
rents have been proven, the demand for the proposed project is
strong and the numbers/returns look great — you have to imagine
everything that can go wrong and find a solution for it, before it
I was fortunate to have witnessed these loans perform well
through the economic downturn with a “near-perfect” track
record in performance and repayment. For every deal that closed
and was successfully repaid however, many deals were a “pass.”
That said, finding the right deals can be a difficult task even in
strong market conditions. Understanding what the investment
could potentially look like in a down market takes time and
patience. A good “sizing up” involves a consistent theme of
questions in a sponsor/developer interview.
BASIS
Basis is the actual cash proposed or already invested in the
deal with no imputed equity. There is no better way to start a
development deal than with a great “buy” and great backstory. Is
it an off-market deal?
Or even better, a distressed sale off-market acquisition? If the
answer is “no” and the basis is “market,” meaning the developer
is acquiring the project by most likely being the highest bidder in
a widely marketed opportunity, then you’re asking a prospective
capital source to invest to replacement cost, with very little
margin for error in the overall business plan.
An off-market deal coupled with a good story, such as a
distressed sale, first time on the market, or acquiring a bank-
owned asset where the purchase price is at a fraction of the
prior owner’s basis makes for a great start and gives an inherent
overall “cushion” or “value-add” in the deal that translates to
higher returns.
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