Intelligent Risk? The INVIZEN System is designed to manage and eliminate investment and lending risks in a seamless, end-to-end perpetual program that operates in near real-time.
The Common Mistakes CRE Developers Can’t Afford
The reality facing the post-COVID commercial real estate development world is that capital funding requires attention to risks everyone previously assumed were part of the business.
Prior to the pandemic, investors and lenders were not as focused on execution risk, business activity complexity, fraud and financial reporting transparency – the key drivers of default risk. Today, many developers are finding it difficult to obtain new construction capital financing. Whether it is equity capital, debt financing or hybrid capital funding, those previously cherished financial participants seem to have faded away. Anxiety is the new norm.
Obtaining capital financing comes down to demonstrating a viable exit strategy for the lender or investor, demonstrating a profit opportunity that is supportable, and demonstrating that risks are all manageable. It’s the last issue that now has ensnared many otherwise promising capital funding proposals.
Mistakes You Can Not Afford
The capital markets are now in the process of realigning themselves and seeking a return to previous operating tempos. Investors need capital gains and sponsors need capital. The shutdown has created a buyer’s market that favors the capital market investor and this means there are mistakes you cannot afford to make.
Business Activity Complexity Errors
The more balls you have in the air, the more likely you will drop some of them. In CRE development, the historical approach of forcing the capital market investors to accept the totality of development risk is not going to work without a huge balance sheet in back of you. If you are not a balance sheet lending candidate, then consider segregating the development project into a series of transactions. This segregates risks and also creates the opportunity for a lower overall cost of capital at the same time.
Execution Risk Management
The execution of your plan of operations (or development) requires proactive risk management owing to fraud, embezzlement, communication errors, and changing market conditions. Nothing less than a full-on Enterprise Risk Management (ERM) Plan is going to suffice that demonstrates these risks are preventable outcomes and not mitigation outcomes. Mitigation is cold comfort after the loss has already been realized.
Due Diligence Documentation Failures
Every promise you make must be supported by a third-party report, opinion, contract or event. Remember, you are viewed as being so desperate for capital that you will say and do anything to get it. Accordingly, underwriters rely on information provided by someone other than you that has no skin in the game to substantiate the promises you make. If your due diligence documentation is weak, expect a weak response in the form of repeated rejections.
The post-COVID capital market conditions will undoubtedly change and evolve. Our job is to evolve with them and understand that market economies require us to sell to the market what it says it wants to buy in order to maximize the opportunity for a successful business enterprise to survive and prosper.