The Weakest Link - Advice for New Developers
Not every real estate developer awakens a consummate pro on Day One. No developer can begin his/her career with an illustrious track record (although coming from an esteemed real estate family or having serious success in an allied field certainly doesn't hurt). Not every development team has successfully completed four or five similar projects in the last three years (i.e., the sort of track record that any lender or equity investor would like to see). Yet somehow there will be new developers and new development teams that will continue to emerge and get their projects financed on a regular basis.
How then is it possible to obtain financing for promising newcomers and to somehow bridge the gap between rookie and contender?
It all comes down to The Weakest Link. Stepping back and objectively taking a global look at the Plan and the Players and then identifying and rectifying any areas that need strengthening and improvement. Finding ways to foresee and to overcome the objections that most lenders or equity partners would raise well before they ever see your deal.
For example, if the core team has limited net worth or has all their net worth tied up in bricks and mortar, then perhaps the team needs to add an equity partner with deep pockets and a lot of liquidity. Of course, even higher on the wish list than mere money (since there's plenty of that chasing good real estate deals these days) one would want to hook up with an equity partner that has relevant expertise specific to the upcoming project: For example, if your development plan involves an office building in Chelsea, your ideal equity partner not only has the requisite liquidity and financial depth, but also has either a strong background in commercial real estate or perhaps contacts in the art business to focus attention on your project and to fill some of the space in the building.
If the development group has a strong track record owning and managing properties but has never tackled new construction before, then the way to defuse concern is to "cast" a construction company that has a successful track record; preferably one that has built your project type (for example, a 50,000SF condo development in Manhattan) numerous times over the last 3 or 4 years.
For residential projects, it's important to note that most lenders will analyze a condominium development as if it were going to be a rental property, imputing comparable rents into the pro-forma, and then arriving at an appraised value based on those rents.
A project that only makes sense based on projected sales may have trouble getting financed or may lean more heavily on the developer's personal guarantees or on cross-collateralization with other cash-flowing properties. When all the pre-development or development consulting work has been completed, and your deal is ready to be "shopped", the development team should be ready to stand up to the scrutiny of both lenders and equity partners.
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