A Dozen Things to Consider If Seeking Joint Venture Capital for Residential Development 

07/05/2020 09:17 By Team GIC
They say a Team is only as strong as its weakest link and as you can imagine, investments in real estate can range from the relatively inexpensive to the extravagant, depending on location and the specific asset whether Residential, Commercial or Mixed Use as well as ground up or conversion and not forgetting whether any existing income or not. 


Either way, even when looking at a modest or starting investment, there is always the risk of unexpected issues and chances are more than likely this will be the case. Planning, Execution & Contingency are crucial - better to spend more time planning than rushing into a project. 
Part of those crucial steps in the investment process is raising capital both senior debt, mezzanine and for the purpose of this article, Joint Venture Equity which will be our focus. Potential capital providers range from private individuals, private equity firms, asset managers, family offices, pension & investment funds and even housing association to name a few.                                

Whilst all these named stakeholders are looking for solid returns, there are a number of things they will be considering before stepping down this path, including who makes certain decisions, whether the site is ready to build on, or what kinds of potential downsides there could be ranging from experience, market - economic, political, social etc. 

Below we explore some of the crucial factors that real estate developers should keep in mind when raising funds for an investment and why those considerations are so vital to their long-term success. 

We aim to deliver much needed capital for SME’s and Property Developers.

1. Transparency & Expectations... 

Transparency as well as setting clear expectations for all parties is crucial at the start and ultimately builds trust for should be a long term WIN, WIN, WIN business partnership. Typically the developer is the general partner with the equity capital provider being the limited partner and may or may not have any say in the finishes chosen for a rehab / development scheme. Can they stop by the property and give direction? Generally, they provide funds for an agreed-upon rate of return plus profit share proceeds. As can be expected if you are dealing with the more seasoned private equity, asset management or family offices, do expect dictation of level of involvement, reporting etc. 

2. The Financials & Projected Returns... 

If experience is one critical factor, the reputation is next and just as important as your most valuable asset, and investing in real estate is a long term game with each project lasting anything from 15 months to 60 months or even longer. This means that you'll want to raise funds again and again hopefully and preferably with the same investors. Will those investors want to work with you again? The answer is  YES & IF you deliver on and execute according to budget, timeframe etc as promised. It is therefore important to be very cautious with your projections, planning for the worst and any and all unexpected events - the proverbial, under promise and over deliver. Ultimately impossible to foresee every eventuality with COVID 19 global health pandemic being an example however, RISK planning and CONTINGENCY are prudent ways to mitigate the unexpected. 


RETURNS 

  • Typical expectations is IRR in the twenties and or 1.5 - 2x Equity multiples subject to development circumstances. 
  • Fixed & preferred return on capital drawn 
  • Profit share ranging from 50/50 to weighting in favour of majority capital contributor of 70/30.

Simply put, if you are risking the least of hard cash, its reasonable not to expect profit share in your favour. Not forgetting the fact that you will have earned a development management fee before anyone else. 

3. The Right Perspective 

Simply put, "put yourself in the other persons shoes". When you are raising capital like in an business negotiation or exchange, you MUST look at things through the investors' eyes as well as yours for a WIN, WIN, WIN and more importantly be able to anticipate concerns and therefore address them satisfactorily. "Failing to plan is planning to fail!" and many real estate developers and business people alike fail to prepare for what should be most basic expectations like

  • How is my money secured? 
  • What is my guarantee should things go wrong? 
  • What market data can you provide to back your financials, back your property sales values? 
  • What independent cost consultants or quantity surveyors reports can you provide to back your build cost assumptions 
  • Do you have adequate Net-Worth to back your personal guarantee? 
  • Is the corporate guarantee you are offering, backed by adequate assets? 
  • Is the business even solvent? 

Capital is primarily concerned with half a dozen key factors

  • Demonstrable ample experience of executing similar projects successfully on-budget, on-time and anticipated returns. 
  • The Team thats going to deliver the project and their demonstrable credentials 
  • Prudent business plan backed by concrete data, market etc as well as risk and contingency assumptions 
  • Project timeframe - the longer the risker and the more difficult to determine risk factors 

Simply put what investors what to know is 

    • Whats the RISK and 
    • Whats the RETRUN offered and putting into the mix, is this project and developer worth investing in and with? 

4. Co-Investment Capital - Your Contribution 

Your monetary, quantifiable commitment to the project is not an option but a MUST when raising funds for real estate investments. If you can't put your own CASH into a project and are not even willing to provide appropriate personal guarantees (PG), it says one thing and one thing only - I want you to risk your capital but not mine. Its surprising how many "so called" developers as well as business people want to take third party capital on a handshake that they would not do themselves if the tables were turned. Be prepared to fully commit if you believe in your business plan as much as you say. After all, "Actions Speak Louder Than Words."

5. Professional External Team Players

Note. Raising money for real estate development investment should be from professional capital lenders (specialist development senior debt providers, private equity, family offices, asset managers and the like) who understand the market and the risks. Professionals will provide a service of giving real feedback on your investment and if successful in partnership will bring a lot more to the table than just capital - their experience and market expertise; network of industry contacts etc. 

Corporate & Commercial Law 
  • Your legal advisers to review and assist with all contractual law matters from joint venture agreements to contractors, acquisition and ultimately disposal and dissolution Sherrard Solicitors 

Cash Flow Finance, Invoice Finance, Development Debt, Mezzanine & Joint Venture Equity Capital 
 We understand that there’s no one size fits all policy when it comes to business finance. Your business model, sector, ambitions, and numerous other factors all play a role in deciding which finance option is the right one for you.  

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