Understanding How You Can Take Advantage of the Underwriting Process to Maximize Your Odds of Success
Underwriting always comes down to three key items:
Before I get in the deal, show me multiple ways I can get out (Sustainable Exit Scenario).
Show me a yield that corresponds to the risk that justifies my risk-taking (Risk/Reward Relationship).
Prove to me that you can control my risk exposure (Default Risk Prevention).
For CRE developers, promoters and issuers, capital access is the entire ballgame. Without access to capital, on terms that are acceptable to all parties, the project is just another idea on a cocktail napkin. According to a recent SBA report, more than 4 out of 5 privately-held businesses seeking capital fail to obtain the capital. Rainmaker Analytics provides underwriting and due diligence support for private placement securities offerings and post-funding services that are specifically designed to prevent the very same problems that cause investment losses (and hence, the decision to reject a given funding proposal) from happening on an ongoing basis.
The Key to Understanding
So what are the keys to understanding the financing process and why obtaining capital financing is the highest risk activity any CRE developer has to endure?
Actually, there really is only one key underwriting element that drives everything, yet companies seeking capital routinely ignore it, and fail to obtain capital.
Exit scenario support is driven by market opportunity. No security or CRE property is worth more than the present value of its reasonably expected future cash flows; period the end. Most developers can demonstrate some level of exit scenario assurance and talk their way into the second issue.
Every developer thinks the financing is driven by the targeted yield. Yield is important to be sure, but it is very subjective in nature because it depends upon so many factors the developer cannot foresee or control. Most developers can demonstrate some level of support for the targeted yield. But then…
That key element is default risk prevention.
Default risk prevention is where underwriting almost always kills a majority of transactions. It all sounded so good until we do the default risk underwriting review, then the wheels come off the bus and that’s the end of the deal.
Making it Easier
Default risk is made up of a variety of factors, all of which conspire to create future investment loss risk for investors and lenders. Developers think of default risk typically in terms of “construction risk”. Construction risk is only one part of the entire mosaic of default risk, yet it is so complicated many underwriters won’t even try to address it because they don’t understand the business or what can turn a given construction risk into an investment loss reality.
Rainmaker Analytics offers a systemic approach to eliminating excessive default risk exposure through our iCREDIT system of program services. If you aren’t using them, you are just costing yourself time and money, while still taking risks you may not have to take. Find out how we can help you pass the default risk underwriting hurdle thru our system that specifically addresses the following key default risk issues:
Construction/Developer Execution Risk.
Holding Period Execution Risk.
Financial Transparency Reporting Risk.
Vendor Performance Risk.
All of business, like all of life, involves measured risk-taking. Every business decision is a gamble on the future and you can win or lose based on the events you know are going to happen, those you think may not happen, and those you don’t know about. If you do not appreciate these factors and provide a plan that demonstrates how you will control them, you are going to fail to obtain capital.
There are no guarantees of a successful placement – not even for our federal government – and anyone who tells you differently is probably just committed a form of fraud. Start with a call and a free construction risk investment loss risk assessment where you can learn how much risk exposure your project already has baked into the deal before you even submit it to underwriting. Call us at 832.663.9634.