The below is presented as general advice on real estate investing. Finalyze makes no claims that the below advice will work in every investor’s situation. Please seek professional advice for your specific facts and circumstances.
Finalyze works with developers and real estate investors to help them achieve their financial goals. Clients seek Finalyze’s expertise and assistance in accessing capital to move their investments and development projects forward which is part of the Plan phase in our unique Plan, Raise, and Manage approach. The common question that comes up in conversations is how should I position my project to attract long-term investors?
Readers should also keep in mind that there are regulations around private capital raising and you should obtain professional advice to ensure compliance with the relevant securities regulations that apply in your jurisdiction such as the Ontario Securities Commission (OSC) or the SEC if you are in the United States. It is also important to mention that this article covers scenarios where you are looking to bring in more passive investors that aren’t necessarily a strategic partner for a project. For example, a developer might want to bring a builder in as an investor on a project to ensure that both the developer and builder are aligned towards a common goal which would make the builder’s equity a strategic investment.
By no means can we offer a list that applies to every situation, but we can offer you a set of guidelines and areas to consider. If you are interested in specific recommendations for your project, Finalyze would be pleased to discuss your needs over a free 30 minute consultation at Info@FinalyzeCFO.com or visit our website www.FinalyzeCFO.com to find out more about our real estate finance and accounting services.
Here are out top five tips to attract long-term investors:
1. Project Summary with Key Milestones and Funding Needs
The package should be professionally prepared and include a simple one-page executive summary that highlights the key milestones for the project for the investor. You should indicate the internal rate of return (IRR), funding needs, leverage, and timeframe. If the project is a development project, it will be critical to understand where the land is in the zoning process and what risks there are in bringing the project forward. In general, the earlier the project is in zoning approval the more speculative the investment is and the higher the risk and expected return an investor expects. In Canada, this process can take years while in parts of the United States this can be a few months.
We typically recommend ending the executive summary with a clear call to action which is usually time bound to help ensure prospects can move towards active leads and close on a timely basis to meet your project requirements. You would work with a lawyer to ensure the appropriate subscription agreements are in-place and the appropriate entity structure has been established. Finalyze has extensive expertise in structuring real estate investments and would be pleased to assist you along with your lawyer of choice. Please contact us at Info@FinalyzeCFO.com for more information.
2. Robust Financial Model
While the output package to potential investors rarely includes the full financial model it is critical to have a robust financial model that has been quality control tested. Please ensure you have someone with the right expertise who understands financial models, real estate investment structures, and can test the model for quality control of the data. A model with an error has long-term credibility issues on your ability to raise capital. Feel free to contact Finalyze at info@FinalyzeCFO.com if we can be of assistance with your real estate financial modelling needs. We apply industry best practices to build robust real estate financial models for a variety of investment structures.
3. Demonstrated Track Record with Biographies of Key Players
Potential investors are looking for familiar names, logos, faces, or organizations to give them comfort on who they are investing with and their expertise. You need to outline those key players and be able to demonstrate you have a team of professionals who bring a well-rounded set of expertise to the project. If you have secured financing, auditors, lawyers, or other advisors they should be prominently displayed to help add that credibility to your proposal. Please ensure you have obtained permission from these key players. It is also recommended to list specific projects or organizations your team has worked on or with in the past to help substantiate your track record for potential investors.
4. Market Summary with Key Opportunities and Risks in the Investment
The adage “Location, Location, Location” applies here. Potential investors are looking to understand what is so compelling about your project as it relates to the location. It is important to understand the future and existing plans for the area, access to transit, schools, or other important facilities. What kind of real estate supply is coming online? Will there be sufficient demand to either rent or purchase your units? Remember your project is competing for capital and needs to be positioned in a fair yet compelling manner.
In terms of opportunities and risks, potential investors expect there to be some variability in being able to achieve your targeted return. It is important to be upfront to understand the risks involved especially if the project doesn’t allow early redemptions such as a development project. It is important to outline if the returns will be in the form of cash distributions or an accrued return to be paid at the end when the asset is sold. Future costs need to be estimated upfront with some contingency such as capital expenditures to maintain an existing asset or even some contingency in the construction cost budget for cost overruns.
Weather is another common risk depending upon where your asset is located so ensuring there is sufficient insurance and mitigating procedures will be important. The amount of debt leverage in the project is critical as well as its exposure to changes in interest rates. Finally, what is the “exit value” of the project upon completion? How is this exit value determined and how achievable is this estimate? The concern here is with market cycles the exit value may be overly ambitious.
5. Operating and Management Summary
This section is really about the potential investor gaining an understanding of how will you steward our capital? There are numerous key questions here and they depend upon your project scope and complexity. We have highlighted a few here to help provide a starting point:
– Who will manage the property or development? 3rd party or internal? Are they qualified?
– How will my cash be managed? Will there be 3rd party financial audits? How often do I get financial statements and updates on the valuations?
– How does the management firm get paid? What is the fee structure and how is it split?
– What happens if I need to take my money out early because of an unforeseen event?
It is advisable to include key agreements and documentation for potential investors upfront so that their lawyer and accountant can take a look and you don’t get delayed at the end when you are trying to close out the capital raising round.
We hope the above gives you some best practices in attracting long-term investors for your real estate investment or development project. At Finalyze we apply our unique Plan ,Raise, and Manage approach to help our clients achieve their real estate investment goals.
We encourage you to book a free 30 minute consultation at info@FinalyzeCFO.com where we’d be pleased to help put together a strategy to attract long-term investors!