Be Aware of These Dynamics in Your Search for Real Estate Equity Partners
This important message is for those involved in the development, sale, purchase or financing of commercial real estate (CRE) across the country. In today's world it's all about "using other people's money" so finding the right equity partner is essential to the process. This article will cover how the dynamics of that process are changing and what you need to know to get your next deal across the finish line.
As background, Gold Watch Investment Group www.goldwatchig.com arranges debt and equity for CRE acquisition and construction projects. Our Clients are some of the most active developers in the country. Our financial partners are a mix of equity groups serving both the "middle market" ($5-25M) and higher profile projects requiring equity checks of $25M and above. In total they are the "who's who" of the investment community and I speak with them everyday. Here's what they have to say along with some of my own thoughts that may help you land your next equity partner.
UNDERSTAND WHAT IS A "DEAL BREAKER"
Competition for deal flow among private equity investors is at an all time high. Often, deposits have been made and Sponsors are scrambling to line up capital for fast approaching closing dates. In this environment often times the Sponsor and Investor, "Talk past each other".
Recently we introduced a private equity group to Co-Sponsors acquiring a multifamily complex in a core Chicago location. In the first conference call the Limited Partner (LP Investor) mentioned that the source of their capital would be coming from two separate entities. The Co-Sponsors expressed concern that the their capital was also coming from two different groups and might make the transaction more complicated than it needed to be when trying to agree to investment returns, fees, renovation plans, exit strategy/timing, etc, etc. In the first meeting the Co-Sponsors said, "Maybe we can make this work" which was followed by more conference calls and a site visit. All went well until the Co-Sponsors' Executive Mgmt got involved and gave us a dose of reality that four different capital partners was not a practical solution for this transaction. Subsequently, the deal fell apart. The LP's proposal to bring two equity sources to the table was a "deal breaker" and should have been recognized as such up front. This is easier said than done when both sides want to make a transaction work on a highly profitable project.
BE CAREFUL ABOUT THE LATITUDE GIVEN YOUR DEBT PROVIDER
The restrictions on debt and flushness of the equity market right now mean they are often considered jointly. But it's our observation that traditional institutional lenders want to have a say in just who gets to join them at the table.
We recently worked on an office acquisition deal that had been deemed riskier than average and the senior lender gave us a list of three potential groups they would permit into the deal as equity. Lenders, who always prefer developers with some skin in the game, are also taking a closer look at the perceived equity of land values that they bring to the table. We believe equity requirements will continue to go up as the markets shift and adjust but, remember all is a negotiation. A Sponsor who brings many years of local market experience and significant capital to the table has leverage. Don't be afraid to use it with the lender.
PREPARE AS FEE NEGOTIATIONS TOUGHEN FOR DEVELOPERS
When a private equity-backed entity decides to come in on a real estate investment deal, negotiations on fees afforded to the owner or developer are often the most difficult discussions. With profits getting tighter, developers or operating partners need to have a strong case for taking that slice of the pie and must be ready to defend how the design-build or asset management services justify that fee. There can sometimes be a little more leeway when it comes to talking developer promotes, or the additional share in profit above the share of what the developer puts into the project. This often takes effect or increases as certain project milestones are met so may be a bit easier for all parties to swallow.
BE AWARE OF THE SHIFT IN FOREIGN CAPITAL SOURCES
The recent storyline when it comes to foreign capital has largely been the predominance of the Asian investor via the EB-5 Program. Despite threats from the current administration to eliminate the program most of our our investors don't see this changing anytime soon.
But as the wave of Asian money took over, there are new sources of foreign capital picking up steam. At the forefront is the TelAviv Stock Exchange where US developers continue to sell bonds at a ridiculously low 4-6%. Foreign capital in general continues to be attracted to the safe haven of U.S. real estate markets even as the blockbuster yields of yesterday may be fading. The hunt for yield and new opportunities, however, is shifting foreign equity's focus to include more than just trophy properties in top gateway cities. We are being told that even sovereign wealth funds are beginning to look beyond New York and San Francisco, and are investing in cities like Los Angeles, San Diego, Chicago, Washington, D.C., Atlanta, Miami, Dallas, Austin and Boston.
TAKE THE NEXT STEP
Whether you are looking for a $5M bridge loan to reposition a hotel or a $55M equity partner to acquire a trophy commercial asset, Gold Watch Investment Group has the ability to match your needs with the appropriate financial resource. And, with the help of our Israeli affiliate we can even go off-shore to find you new sources of capital. For larger Clients looking to fund high profile development and acquisitions we are working with accounting power BDO Seidman www.BDO.com to help take developers public on the Tel Aviv Stock Exchange (TASE). BDO has used its experience and boots on the ground on Wall Street and Tel Aviv to have handled almost 40% of the US Bond IPO's in Israel.
The benefit to you is less time "spinning wheels" and more time working with credible financial resources who operate with integrity and have the ability to get you to that all important closing. To request our free 31 page presentation "Raising Debt in the Israeli Capital Market" simply go to: www.goldwatchig.com/contact-us.html For more information about our capabilities and investment criteria, visit www.goldwatchig.com or schedule a call to see if we can help finance your next project.
Scott Westover
Managing Principal
Gold Watch Investment Group
01-858-882-7451