Obtaining commercial real estate development equity financing is the linchpin missing from almost every developer’s repertoire. Commercial real estate (CRE) development financing at all levels (pre-construction, construction, mini-perm, bridge and perm) requires the funding source to believe that the property will either be sold off or refinanced at the end of the term in an amount sufficient to provide the funder with the promised economic benefits. If neither of these scenarios is believable, the answer is always a rejection.
So how do you go about obtaining the capital funding you need to launch your project?
Here are your must-dos that cannot be avoided:
- Obtain site control – either buy the site, enter into a legal purchase & sale agreement, an option agreement or a letter of intent with consideration paid to the seller that gives you legal control of the site. You cannot get into underwriting without this requirement being met. From a practical standpoint, the seller should have an intended-use study or appraisal for full-scope intended-use scenarios that provide verification of the potential use of the proposed site for the commercial real estate income-producing property intended-use that will be the future operating business of the completed project.
- Feasibility study – you have to have an arm’s-length feasibility study that demonstrates the market potential and economic potential of the project proposal. The feasibility study should provide a reasonable basis for the key empirical assumptions utilized in its production in the form of testing these assumptions and the findings of the market analysis within the context of a financial feasibility analysis model that uses this data as the basis for the forecast.
- A&E – you have to have a site plan, development plat, schematic phase architectural design and associated outline construction specifications – all of which have to be based upon the findings of the feasibility study (i.e.: project size, space limitations, unit mix, etc.). This should give you the results of: (1) elevation drawing(s); and (2) plot plan; and (3) development plat; and (4) schematic design sheets for all floors; and (5) schematic design sheets for specific space uses (i.e.: unit size/layout plans, etc.); and (6) the outline construction specifications memorandum that was used by the construction team to develop the pricing for the hard cost of construction.
- GMP construction contract – you have to have a fully-bonded construction contract for the amount shown on the budget by a contractor having the financing capacity, track record and support necessary to complete construction.
- Project team – you have to have commitments for the balance of the required project team (i.e.: property management, marketing, accounting, tax, law, etc.).
Once you have these elements we can commence the underwriting review. The underwriting review is designed to fill-out the capital stack by:
- First, you need the take-out financing source. The construction lender wants to know who is taking them out before they make a commitment. Without the take-out financing source being identified, your odds of success get pretty small – INVIZEN can help you with this all-important foundation element to your funding; then
- Second, you need the construction financing source on the mortgage side. The construction lender will consider the transaction to be a serious transaction if the take-out is identified and we will provide you with the referral to a qualified construction lender; then
- Finally, you need the equity to close. This has to happen, more or less, in concert with the construction loan commitment. The object is to present prospective equity investors with a proposal that looks, more or less, fully-baked. If the construction and permanent financing is accounted for in their minds, then they are the last money to the table and not the first money – exactly where they want to be. We have an extensive network of broker-dealers and registered investment advisers who can help with this issue.
But that is not the end of it all – you must also demonstrate that your proposal demonstrates a lack of term and maturity default risk and that is where INVIZEN can help the most. Our Real-Time Status program is designed to help eliminate loss severity risk on an ongoing basis for the entire term of the investment. This is a fundamental game-changer and you have the opportunity to utilize it because it is affordable.
Please take the time to contact us to learn more about getting your funding proposal together and put to bed sooner rather than later. Call our offices at 832.663.9634 to get more information.