From single-family, multifamily offices, pension funds, alternative investment managers, there is a growing desire to invest directly into real estate opportunities throughout the UK, Continental Europe and the world as a whole.
The key challenge for all these potential capital sources is the ability to properly and efficiently assess the many opportunities to identify the most profitable of opportunities and is subject to internal resources and experience that each entity has.
With the constant and increasing requests from real estate companies wanting a family offices, private equity investors as well as other institutions to co-invest with them, it is essential for these various equity capital partners to be able to screen opportunities efficiently before spending additional time.
Although not exhaustive, below are some of the initial points considered when determining if it makes sense to continue the due diligence process on a new real estate property developer and development scheme. These coincidentally as is industry standard, are the same key factors that real estate investment asset managers, banks or commercial lenders as well as other institutions look at before investing or taking on any debt or joint venture equity investment commitments.
1. Property Developer or Sponsors Experience
Does the joint venture developer partner or sponsor have experience in similar types of real estate investment schemes, property types and geographic markets of the asset that the JV partner is asking for the particular institution to consider for debt or equity capital funding?
Under scrutiny will be for example expertise on the day-to-day operations of the real estate opportunity as the funder must have complete confidence in the JV partners ability to successfully execute and deliver the project on-time and on-budget.
This includes confidence in their ability to not only manage the project during the good times but also understand what to do when things don’t turn out as projected or the market changes direction. On this note, personal guarantees are a industry standard requirements especially to cover the whole loan if debt and if equity to cover cost over-runs as an example.
2. JV Property Developer's Strength
This refers to financial solvency and available tangible assets for which validate the personal guarantees which would otherwise be meaningless with out assets to back.
- Does the JV partner have a strong business balance sheet to complete the suggested project and to weather any unexpected development setbacks or cost over-runs?
- How many projects does the property developer partner successfully completed in the recent past and have in their pipeline?
- Is the JV partner spreading themselves too thin or do they have the capacity to see each of the projects to successful fruition taking into current economic & political market climate as well as supply and demand or any future developments that may affect project exit viability?
- Last but not least for any of the capital partners is, contingency planning; what if scenarios
- What if “the market was hot.”
- What if the project went over budget? Etc
We aim to deliver much needed capital for SME’s and Property Developers.
3. JV Property Developers Track Record
When evaluating a JV property developer, the following questions are asked by both debt & equity capital providers:
- What does their history show? at does their history show?
- Have their returns been consistent?
- How long is their track record?
- If the JV partner's track record is since 2010, is their success because they bought when the market was down, or did they withstand multiple cycles and how did they perform?
The track record says a lot as it can give you some insight into the future of your joint venture. Don’t take the JV partner's word for it — be sure to confirm.
4. Development Appraisal & Economic Viability
One of the key tasks with projects, especially during times of real estate being a go-to investment, is to identify whether the proposed investment is feasible and the projections are realistic. Some questions you should evaluate are:
- Are the finances such that the project's lifetime operating costs are covered and the project still provides an acceptable return on investment for the family office?
- Are the models on the project proposed to the family office by the JV partner aggressive, conservative or somewhere in the middle? Too often, all that is presented to the family office are the best case scenarios.
- Was the project stress tested by running different downside scenarios so that the family office has an understanding of what really could happen and how that would affect the potential returns?
Cost modelling tools from companies such as CostModelling can be instrumental in development appraisal accuracy as well as property valuation from companies such as HousePrice.AI for GDV estimates (Gross Development Value)
5. Financial Incentive & Alignment Of Interest for all Stakeholders
Although there is no one way a Joint Venture is structured, the typical structure consists of 90% of the equity provided by joint venture equity partner entity or debt provider (LP) and 10% by the developer or operating partner (GP).
Typically, after a return of capital back to the investors (both developer and equity partner), capital will then receive an agreed upon-preferred return pari-passu, after which time there is a split of profits above the preferred return as per agreed percentages for example
- 80% to the jv equity provider (LPs) and
- 20% to the property developer (GP).
This 20% is considered a "promote" to the GP, which is essentially the financial incentive for the developers (GP) to carry out a successful project.Any other fees that the developer (GP) may charge such as development or property management fees would be able to be earned at market-rate prices.
Some equity providers prefer a simple structure of 50/50 with minimal expenses going to pay the standard costs.
A joint venture with an experienced property developer is a great way for family offices, investment management firms, asset managers and other institutions to deploy capital into real estate without the need for huge workforce to execute and deliver multiple projects across the globe giving great leverage as well as asset backed attractive returns.
GIC Capital – Matching Capital With Opportunity London +44 (0) 203 290 9019