Equity For Commercial Construction Deals
Ninety percent of all commercial construction loans that are turned down are rejected because the developer lacked sufficient equity in the deal. In the parlance of commercial real estate finance, the sponsor didn't have enough skin in the game.
A bank is not going to make a large construction loan and take all of the risk themselves. They want the developer and his investors to cover 20% to 35% of the total cost of the project. Therefore if your total project cost is $3 million, the bank will want the sponsor to contribute $600,000 to $1,050,000 in cash (equity in the land and prepaid costs) to the project. The sponsor must spend down these equity dollars before the bank advances the first dollar of its construction loan.
Let’s suppose that you’re a developer who owns a $600,000 piece of ground, and you want to build an eight-plex. You owe $250,000 against the property. Do you have enough equity in the land to qualify for a $2,650,000 construction loan? Absolutely not. If your total construction cost is $3 million, and you have $350,000 in equity in the land and prepaid costs, you will need to raise another $250,000 to $700,000 in equity dollars.
So Where Does a Developer Go To Raise Equity Dollars?
Can a developer joint venture with some bank or insurance company?
There are a handful of opportunity funds and insurance companies who will provide venture equity for real estate development projects, but they will seldom look at projects of less than $25 million. To qualify, the development company usually has to be very old, very experienced, and very, very wealthy. Here is a good rule of thumb about joint ventures: The only developer who will qualify for a joint venture is a developer who is so rich that he could build the entire project for cash. Mortals do not get joint ventures.
Are there companies who will raise equity dollars dollars for developers?
You can buy a list of equity providers for about $1,000; but unless you are a very experienced developer, have a large net worth, and are clean as a whistle, you are probably not going to be successful. This small handful of equity providers gets asked to dance a dozen times per day, and they choose only the most glamorous and low risk projects.
Where Do Most Developers Go To Raise Equity?
They raise the money themselves. In fact, most small to midsize development companies devote 25% to 30% of their time to raising equity dollars. They use a different Private Placement for each development project.
Private Placements? Oh, my goodness! I can’t do that. It’s much too hard. Nonsense! A recent law change has made raising equity dollars much-much easier than in the past.
This Is Where a Short Consultation Can Help
My name is George Blackburne III, and I am an attorney licensed in California and Indiana. I am the founder and President of Blackburne & Sons Realty Capital Corporation, a $55 million private money commercial lending company that I founded in 1980. We are one of the longest-surviving commercial hard money shops in the country.
I also founded C-Loans.com, the largest of the commercial mortgage portals, 19 years ago. C-Loans.com has closed more than 1,000 commercial real estate loans totaling over $1 billion. Among the dozens of commercial real estate finance websites powered by C-Loans is CommercialMortgage.com. (We paid $100,000 for this domain name alone.) Between these two portals, we follow the commercial mortgage loan programs of close to 4,000 different commercial lenders.
Blackburne & Sons is also a syndicator, and we have raised 100% of the total project cost on over a dozen different pieces of real estate.
Lastly, I teach commercial real estate finance. My video training courses in raising money from private investors and in commercial mortgage brokerage and have been viewed by thousands of young professionals.
I will consult with you for about an hour, and by the end of the call, you will know exactly how to start raising equity dollars yourself. My consulting fee is $375 per hour, with a $100 minimum.
What Do You Get From This Consultation?
First of all, you need to satisfy yourself that you are never going to qualify for a joint venture. Joint ventures are arranged by the big commercial mortgage banking firms / life insurance company correspondents. The first thing I will do is to turn you on to a number of these firms. You will need to call these Big Boys and verify for yourself that you and your project are not a fit for venture equity.
Then I am going to give you a place to call where you can buy a list of equity providers. This list is not cheap, and we’ll speak candidly about whether or not you are wasting your $1,000. Heck, your CV and your net worth might be impressive enough to attract a regular equity provider.
If we find, however, that are a garden variety developer with a garden variety project (even if the project will be gorgeous and the profit potential is excellent), we’ll have to speak seriously about you raising the dough yourself. Don’t panic! There are people to help you all along the way.
First of all, we’ll speak about a critical law change that makes it infinitely easier to raise equity dollars.
Next, I will turn you on to THREE crowdfunding websites that can help you raise equity dollars for development deals.
I will also turn you on to a good securities attorney to prepare your Private Placement Memorandum (“PPM”). If money is super-tight, I’ll tell you where to go to get your PPM prepared more cheaply. If you are down to your last nickel, you would be unwise to consult with me because you are going to need some dough to pay for the preparation of the PPM, which is by far the most expensive step. I do NOT get any sort of referral fee from any of these service providers, and you are welcome to use your own.
I will give you a couple sample PPM’s that - if you are incredibly tight-fisted and willing to take the risk of jail time - that you could use as exemplars to prepare the PPM yourself. Warning: These sample PPM’s are NOT suitable for your particular project unless you disclose dozens of more risks.
Next I will tell you where to buy lists of potential investors for your project. Lastly we will kick around some good marketing ideas that should produce some qualified investor leads.
Bottom line: Unless your family and friends can provide 20% to 40% of the total cost of the project - your required skin the game - you are going to need to raise your equity contribution from investors. The sooner that you learn these skills, the sooner that you can move on to your second, third, and fourth project. Small to midsize development firms devote 25% to 30% of their working hours to raising equity dollars.
What Is the First Step?
If you need help raising equity dollars, I am available for consultation at the rate of $375 per hour, with a minimum of only $100. I consult three times per week at precisely 1:30 p.m. ET on Mondays, Thursdays, and Fridays. Please call my son, Tom Blackburne, at 574-210-6686 to set up a consultation.
Think you can't afford a $375 consultation? What is the monthly carrying cost on your land? What is the monthly payment on your land loan? What if you dilly-dally so long that the recovery ends and your window closes? Can you afford to carry your land through another recession? Quit dilly-dallying. This equity-raising stuff is not that hard.