There is no doubt that CRE investment remains a matter of strong investor interest. The demand for securities in CRE private placement offerings in Delaware Statutory Trust (DST) and similar 1031 exchange vehicles appears to be well short of saturation. The demand for qualified sponsor transactions is becoming the take-out financing scenario of the future for commercial real estate developers seeking capital financing for new construction project proposals.
Here’s how it works:
- The developer produces a standardized set of due diligence documents to provide the form, content and depth of due diligence support required for institutional investment consideration; then
- The developer enters into a joint-venture agreement with a qualified sponsor (or elects to expend resources to qualify) for the acquisition of the stabilized property by a DST; then
- The developer utilizes joint-venture agreement commitment as the basis for the take-out requirement of the construction lender and provides the necessary due diligence for completion of construction loan underwriting; then
- The developer utilizes the broker-dealer network to fund the required equity financing based upon the production of all remaining due diligence documentation; then
- The developer utilizes the funding commitments to obtain mezzanine level participating debt for construction and pre-stabilization phase operations; then
- The project closes escrow on construction phase financing; then
- The project is built and launched; then
- Upon stabilization the DST offering is closed and the construction loan is retired; then
- The developer has the opportunity to participate in the resulting DST sponsorship on an agreed-upon level negotiated prior to the commencement of construction loan underwriting.
This approach creates a complete CRE financing chain to potentially change the way the CRE development finance vertical works on a private placement basis.