For the last 29 years, I have been raising capital for my own companies. Frankly, I think it’s what I do best. Through in and throughout these deals, I’ve discovered the basic fundamentals that seem to hold true for most capital transactions. I’m going to go over these simple concepts, as I believe that sponsors and fund managers regard them as crucial in establishing capital partnerships.
1. The “TRL” Test
- This is the most important. Simply put, they must what they say they do. Usually, they have several references that can attest to their competence and trustworthiness. Their reputation should be impregnable.
- We are looking for a true expert in the field. Ask yourself if their business plan show preparation, contains realistic underwriting, and aiming towards conservative and achievable results.
- This trait is not often not discussed or understood, but I’ve found it to be vitally important. The Capital needs to “like” the sponsor, and consider them a person that they can relate to, even outside the realm of the deal. Some may dismiss this trait as “not so important”, but I have found more often than not, that this is x-factor that moves the deal forward. Basically, it’s essential that both parties feel good about working together.
- The most successful deals are often the result of good timing and relentless momentum. Timing is generally the hardest variable to predict, with market conditions changing fast, “tipping points” for trends, and unpredictable buying patterns. However, I strongly believe that timing can trump all other analytics of a successful deal. I have experienced this first hand, as I was fortunate enough to take part in three iconic Booms. I had tremendous success during the dot-com boom, the Florida Real Estate boom, and Bakken oil housing boom, and firmly believe that great timing just as important to my success as the deal itself.
- “Location, location, location.” This common expression describes this primary fundamental of real estate. Let’s remember that a strong location does not GUARANTEE success, but it absolutely increases the probability for it. Some examples include; urban areas where job growth is booming or waterfront real estate, where there is a scarcity of potential properties. (They can’t create more oceans!)
- Finally, let’s not forget how important your concept is. I’m referring to your plan here. These are the strategies that will create value, help raise the property’s new worth, and increase the NOI of your deal.
3. Exit Strategy
- This vitally important plan helps investors/lenders to understand how and exactly when the exit plan will be executed. This exit will hopefully determine and project the eventual returns that all capital groups are interested in. Some xit strategies may include; Refinance(a sale to a third party), a sale to a LIHTC Partner, (Millennia Housing’s strategy) or a JV opportunity amongst other avenues for an exit!
4. ROI (Return on investment)
- Let’s face it, at the end of the day, ROI is what attracts ALL INVESTORS. What is the return on their monies invested? This important calculation can be figured in several ways. There is usually a cash on cash return following the duration of the investment (before the exit/capitalization event). Also, there is most likely a project based IRR. In today’s investment environment, a deal that can deliver a 7.5% cash on cash and a 12% IRR, is definitely a deal worth investing in. Of course there are much stronger returns as well, but the investors with have to base the returns on the many risk factors involved. The opportunistic funds will look for a 10%+ and a 17%+ IRR, but there are increased risks associated with these such deals.