Knowing how capital sources make decisions and analyze investment risk provides unique advantages to operators seeking capital. As our Managing Director Steve La Terra highlights, capital providers tend to have a formulaic approach and view opportunities within narrow investment parameters. This makes some sense when you understand that capital providers often see time (a non-renewable resource) as more valuable than money (a renewable resource). This is also why you may receive a very quick “no” when pitching a deal but getting to “yes” takes time. With decades of experience with private equity, institutional lenders and other large-scale real estate capital sources, Meyers Research has great perspective on the capital markets. Below we have assembled a few insights that may prove valuable to you when making a pitch for capital, including:
- Capital Sources tend to view risk within distinct “silos” that can be considered separately, including operator risk, development risk, entitlement risk and market risk. Market risk tends to be the most mysterious of these and it is often where the most attention is paid.
- Every deal that receives funding has a compelling “story”, which may be a unique market factor or operator relationship, but rarely is a particularly attractive development proposition or entitlement situation.
- If you make it past the first round of questions, your deal has gained an advocate within the capital source. While you may not feel as though your contact is supportive of your deal, these advocates are responsible for “selling” your deal internally and so they are very focused on understanding all risk factors and downside scenarios. Know your advocate and help them in any way possible.
- Your deal will endure several layers of scrutiny from initial and cursory to intense and detailed. Every “what if” scenario will be considered and your advocate will have to answer all of the questions. If your advocate is embarrassed because they don’t have all the answers, your deal will not get funded. Don’t try to hide details.
- Your deal will be competing with other opportunities for the time and attention of the investment team. While your deal may be perfectly packaged and nearly ideal in your mind, if a “better story” comes along, you may be on the losing end for no good reason.
The good news is that once you have established a successful track record with a capital source, you have established a renewable “story” (relationship), have a successful advocate and you have addressed the operator risk component of the underwriting process. However, capital sources change their appetite frequently, so keeping your capital raising skills sharp will be an important advantage for your company.
Contact us to discuss how we can help with your next real estate development.