When it comes to financing, developers and home builders will often have many different funding options to choose from within any geographic market. The challenge? We call it the stars aligning. Meaning when your timing, deal size, geography, duration and asset class match the profile of the group that is allocating the capital.
While finding the right fit for each individual firm can be difficult, we believe the largest part of the problem is you have a business to run and you don’t have the experience or time or contacts to source the financial partnerships
Here are some key tips:
1. Do your homework. Be certain that your company is vetting appropriate partners for servicing your short- and long-term business needs. Make sure your house is in order with deals in hand and tight financial projections. Is your bench strong enough to handle this growth and are you appropriately aligned with the various trades you will need for execution? Investors are not looking for one-off deals, most are looking for a programmatic relationship….so you need to prove that you can scale. Can you find more deals and can your team handle the growth ?
2. What does a potential capital partner bring to the table beside money? Will they be able to fulfill your capital financing needs to the fullest extent, or will working with them cause you to look for financing elsewhere in the long term?
3. Does the capital brokerage firm or correspondent fully understand the direction you’re planning to go with your business? When both parties fully understand the end goal, it will be easier to define tactics and strategies on how to get there.
4. Is your business culture and that of potential capital partners in alignment? Certain companies operate on their own rules, and are not accustomed to institutional style capital sources, while others prefer institutional options for growth and positioning. Deciding which style would best suit your business and its needs is crucial to selecting a financing partner.
5. What happens if your needs change midway through a project or development?
Depending on the asset class, planning alternative options in the event that clients’ needs change and developing a timeframe to exit are both critical expectations that need to be set. Brokerage firms should be able to help with these strategies.
Look for partners that understand methods for lowering the effective weighted cost of capital through financial engineering. Currently, potential off-balance sheet structuring and methods are being used to improve return on equity for projects.
6. Do you have plans for growth and expansion? These definitely are important to share in discussions with any potential capital partner. The more specific your plans are, the more efficient a capital partner can be in helping to fulfill the needs of your company. Above all else, the firm you select to work with must understand your current capital stack and future needs, or you may need to seek additional help.
7. Should you choose one company or have relationships with multiple capital firms?
While some companies will opt to work with multiple capital firms, more often than not it would be far more beneficial to work with a single firm that is able to handle all aspects of a business’ needs. Any intermediary needs to have multiple capital sources throughout the capital stack, traditional debt, equity, and mezzanine financing can often be streamlined through one singular capital partner.
8. Don’t just jump at capital simply because it’s readily available. Forming the wrong partnership will definitely cost your business money, but what it also costs is TIME – something builder/developers cannot afford to squander. Choose the right financing relationship for your business from a national capital advisory group that provides capital solutions and strategic financial relationships to real estate developers, property owners and capital providers.
9. Is the capital firm strategic, versatile and knowledgeable? Be open and fully transparent with goals and growth plans. Understanding the full scope of the business’ end goals and growth plans simply positions both parties for success and makes it easier to develop specific tactics on how to reach growth and goals more efficiently and effectively.
10. Building a solid long-term relationship with a capital partner will bring far more value to the table than just the capital they’re offering. Whether your business is in the beginning stages, in a period of growth or planning towards growth, having a trusted relationship with the capital firm positions your business to become tighter and more strategic with its plans.
Bottom line: Any partner(s) you choose to work with must have the flexibility to grow with you, in different forms from multiple sources of equity placement and debt. Being able to raise these funds is the nuts and bolts of our business
Jeff Carlson is the managing director of Land Advisors Capital. He’s a 30-year industry veteran, former CPA and division president of a Top 10 public homebuilder.