Commercial Real Estate Co-Investment

Co-investment in commercial real estate is elusive to be sure, especially if you are a new developer or working with a new asset class.  Historically, obtaining commercial real estate development co-investment financing (j/v financing) is an exercise in frustration and failure for many, many commercial real estate developers and sponsors.  To be a successful commercial real estate co-investment financing candidate, you have to answer the two (2) key investment considerations:

  • Does a verifiable potential opportunity to deploy capital and earn an above market return exist?
  • If the previous answer is yes, then the more critical question is whether or not the project can manage execution risk – meaning, if the sponsor is taken out of the transaction will operations continue rather seamlessly or will there be investment loss severity risk?

The first question is answered with a relatively straight-forward process.  The successful candidate has a third-party market and financial feasibility study that demonstrates market evidence of the opportunity.  Furthermore, the resulting project is designed and developed in light of the recommendations and findings of the market and financial feasibility study recommendations and findings.  You would be surprised how many developers design the project first and then face rejection because the design is not consistent with the purchasing preferences of the end-user/consumer demographic being potentially addressed.  This is a key risk management element that cannot be overlooked.  Having said, the feasibility study demonstrates the market opportunity (or not) for deploying capital and potentially realizing above-market yields.  Demonstrating the opportunity to receive above-market yields on investment is critical because there already exists opportunities to receive a market yield where the investor does not have to take the risk your project may represent, so why else would they seriously consider your project financing opportunity in the absence of the enhanced yield?  Risk versus reward is a critical consideration.

Addressing the second question is what probably kills most deals.  Everything boils down to whether or not the proposed capital financing demonstrates enough execution risk management traits to justify the deal or not.  The habit of the capital markets has been to rely upon subjective measurements like character, experience, “skin in the game”, education, etc.  This is an approach the nascent developer cannot generally win.  The demonstration of the ability to manage execution risk requires documentation to back up the oral representations that includes:

  • A business plan of operations – it has to go down to the lowest employee class level and demonstrate accountability and flexibility.
  • An enterprise risk management plan – how capital investment will be managed for the benefit of investors, the business model to be used to penetrate the market and the conditions that would cause an exit from the investment (good or bad).
  • A regulatory risk management plan – the more complex the operations or industry, the more important this plan becomes.
  • An employee risk management plan – how employee relations will be conducted to minimize claims for loss from employees.
  • A third-party claims risk management plan – how operations will be managed to prevent and mitigate third-party loss claims.
  • A management reporting and communications plan – how every member of the organization will communicate information up and down the chain and how management will be communicating with employees, investors, lenders, regulators and the public.

INVIZEN offers the only live business planning program that is directly tied into execution risk management and the totality of subjective investment risks that is designed to follow your business and help make it more efficient every month of the investment holding period.  If you are seeking capital investment from the equity markets, then you have to maximize your odds of a successful outcome and not eliminate any potential sources of capital investment.  This program is tied directly into our market access program to provide developers with the opportunity to obtain capital.  Contact us at 832.663.9634 to learn more.