Lauton U: Beyond The Basics Development Projects - How to Put Together a Funding Package The Right Way

Funding packages for development projects contain the same basic elements found in most project packages. Previous posts discussed each of these components at great length. Before going further, we strongly suggest you read up on them - How to Put Together a Funding Package that Will Get Investors Excited about Your Project: the Basics Part I and II.
In today’s financial world, developers are have a very difficult time trying to raise the funding they need for their project. Often times their very own package creates unnecessary hurdles for them because they fail to include certain critical items. This is why we are taking this opportunity now to go over those unique elements that are a must for any comprehensive development package.

Developers’ Resumes
Including resumes of the developers along with that of their team is extremely important. What projects have they completed in the past? How often did they complete a project on time and on budget? What projects are they working on currently? All of this serves to add credibility to a package.
Investors know that the success of a development project hinges on the construction teams’ ability to complete the project on time and on budget. Therefore, they’re going to be very interested in their track record. The longer it is the better.

Here’s something else clients sometimes often overlook. A developer must have relevant experience. What this means is that they should have a long and successful history doing projects similar to yours. If you are trying to building a five star hotel, don’t hire a developer that has only done residential communities. That experience does not translate at all. If you are looking to build a refinery or a mall, don’t look for someone who has been building resorts for the last ten or fifteen years. You need to be working with a team that has a deep history completing projects like yours.

How much is your risk?
One of the most important things that concern investors today is risk. As far as they’re concerned, the more a principal is willing to take part in that risk, the more comfortable they will feel sharing in it with them. For this reason, it is always a good idea to have as much of your own cash as possible in your project. As long as capital remains tight and the credit markets stay sluggish, investors will want to see you sharing as much of your project’s risk as possible.

And mind you, equity is not the same as cash. Investors want to know how much you stand to lose, in cash, if you do not make this project happen. The bigger that number, the more convinced they will be that you will be committed to seeing your project through to the very end. Given the downward spiral property prices find themselves in across the country, they have very little faith in appraised values so, at least for now, cash is king.

Entitlements
It is a very strong plus for a developer to have all of the entitlements in place. As a rule of thumb, the further along you are in a project, the easier it will be to raise money for it.
It is very different to try to raise funds for a project where the land has already been acquired, the necessary entitlements and infrastructure are in place; and all you need to do is the build out. That is a lot easier to do than someone who has a concept for a project, but does have a place to build it. Worse still, is to not even have a purchase contract in place.
If you are in this boat, our advice is this: “Wait before you start to look for funding.” It would be a complete waste of time to do so if you don’t have most everything in place. No one is going to take you seriously.

Typically, commercial property sellers will give you a 30, 60 or even 90 day window to secure your funding. It all depends on how well you negotiate the deal. This is especially true if your trying to buy raw land. Most sellers know how difficult it is to get financing for raw land because, of all of the types of real estate available, raw land is the most illiquid. In other words, it’s the hardest to turn to cash when it is time to sell. Lenders and investors know this and that is why they are currently offering such such small loan to value ratios, high interest rates and are taking longer performing their due diligence.

Appraisal Report and Feasibility Study
Appraisal reports and feasibility studies are not required by most lenders since they typically order their own. Still, you would do well to get your project evaluated before you even start looking for funding. A few would be willing to use your reports provided that they’ve been performed by accredited, reputable firms and they are less than 3 months old. More than anything else, they are proof that you have done your research and that you know know exactly what you are doing. Their value is in how they exhibit the strength of your project.

For commercial projects, appraisals must be done by a Member of the Appraisal Institute— an MAI certified appraiser or equivalent. If you present a residential appraisal for a commercial project, no one is going to look at it and you will be left with a lot of egg on your face.
A feasibility study is critical because it helps you show investors and funding sources that you have a real market for your project. Be it a hotel, condos, single family homes, town houses, luxury homes, a mall or a resort, you have to demonstrate that there is enough of a market demand to substantiate your project. You have to show that what you are building will be absorbed by the local market. If it is not, no one is going to invest any money in it. Why would they? This is where a feasibility study comes in—to provide solid evidence that there exists a strong demand for your product.

Hotel Projects
With hotel projects, you are expected to present a Letter of Intent (LOI) from a reputable and prestigious management company that will come in and handle the day to day operations. This is critical if you do not have sufficient experience managing hotels. You should look to the major names for this service. A Hilton, Marriot, Wyndham or the like will do just fine.
All hotel projects also need to have a seasoned reservation system in place. Investors will require that you have a contract with a highly reputable firm willing to handle your hotel’s reservations when you are finally on line.

Mall Development Projects
When talking about malls, make sure you include in your package LOIs from big box stores that are interested in leasing space when the project is complete. The more pre-leases you have, the easier it’ll be to convince investors of the viability and profitability of your project.

Residential Developments
In similar fashion, if you are working on any type of residential development, make sure you have pre-sales. There is no better way to demonstrate that there is a market for you product than with pre-sales. If you tell investors that there is a need for your homes, but you can not produce pre-sales, you will loose all credibility in their eyes. Even if you do not have a feasibility study, but you have pre-sales, you are still in the game.

Other Issues Critical to Development and Construction Projects
Make sure that the property title is clear. Title issues, encumbrances and other “clouds” on the title need to be resolved prior to closing a deal with a potential investor. They shy away from troublesome complications. Do everything you can to give them a nice neat package.

Cost of capital
A few final words. The neater, cleaner and more comprehensive your package is, the easier it will be to successfully raise the funds you need. As an added plus, the better your package the cheaper your effective rates will be on your funds.
If your package is complicated, riddled with uncertainties and question marks, it will negatively affect the pricing and terms you get. This is especially true if you are pursuing debt financing.

Most important of all, securing financing with favorable terms takes time. A lot more time than it used to. Investors and funding sources are not as eager to pull the trigger as they once were. They are definitely taking their time to thoroughly vet a project before they commit to investing anything in it so give yourself at least a 60 to 90 day time-frame to finalize your funding. This is not something that can be rushed.

As my friend Piyush would say, “You can’t make a baby in one month by getting 9 women pregnant.” As far as commercial project funding is concerned, truer words were never spoken.
Those are all of the key issues you need to be aware of as you put together an investor package for development and construction projects.
Feel free to send in your comments and questions. Our goal and ambition is to engage you in a productive and mutually beneficial dialogue. We look forward to hearing from you. Until next time!