Best avenue for raising capital
So I have been considering doing my own thing for a while as the market is tight. Like anyone I am facing the old "How do I raise capital" challenge. Anyone have input on beginning stage capital raising and how they have had success? You don't have to give away the playbook but any information would be helpful.
I have heard syndication, obviously friends/family, seems like crowdsourcing is an option. I am just trying to be realistic in my approach as this is obviously the greatest hurdle for most folks.
Anyone investing $ in your first deals will fall into two buckets:
1. They are investing in you- they believe in you and trust you enough to throw you a couple 100k
2. You have a screaming deal- If the deal is good enough (and big enough), its not that hard to raise institutional capital, or at bare minimum secure a co-GP with a well capitalized operator who is willing to go 50/50 with you on the promote
Starting out you are going to be doing small to middle market deals that will be capitalized by either friends/family, third party individual investors, or potentially other RE investors if you have the background and relationships to attract them.
For the first two buckets you should reach out to everyone financially well off that you know and you may think want to invest. It helps if they have a good opinion of you. If you have progressed career-wise through good firms these could be your former coworkers and/or bosses.
If you have been in an institutional dealmaking role you have unique connections to principals at other real estate firms. Reach out to them, tell them you are looking at going out on your own, and you might me surprised how they support you. It might not be your first deal, but if you stay in touch they may be there for your 2nd or 3rd
Have you done this yourself? It seems a lot of small-medium sized checks could lead to a large headache, 20 investors in one $2-$10M deal may be the move but challenging to deal with in reporting for a small deal. Do you have any services you may recommend?
Doing small deals in general is a large headache. You have to do the same stuff you have to do for a large deal but without the large absolute value of the upside (i.e. small deals can have a high IRR/multiple but the base numbers are low). You deal with the bs of small deals so you can prove yourself and be able to raise money for the larger ones down the road.
Keen on his advice as far as its concerned for experience with institutional fundraising. Would be my approach once family / friends outreach is near exhausted.
Assuming you have the experience/knowledge/skills, an attractive deal offering, and a business plan to execute the deal full cycle - you’ll need to identify a Co-GP partner who you can vet thoroughly and who can vet you thoroughly as well, as the sponsor. The likelihood of a HNWI individual named Bob who doesn’t have the domain knowledge to vet you will most likely not invest in you. Bob would be more inclined to invest in Joe who has grey hair, has projects to point at that he personally invested in, and has the ability to sign the guarantee. If you are in development and have years of development experience but little to invest, you’re better off finding a co-developer partner. Let’s say this guy’s name is Jack - Jack may be interested in the Austin Texas market but he’s out of state in Denver, Colorado. You do your due diligence by looking at Jacks’s website and looking at his project portfolio - you notice he developed a 23 acre site for a 345,000 SF cross dock manufacturing warehouse consisting of three buildings and the anchor tenant he retained inside specializes in medical component manufacturing that requires a clean automated process. Setup a meeting with Jack, introduce yourself, give him your elevator pitch, talk through his deals, and his deal criteria and garner trust by talking shop. You come away from the meeting that he would do a rinse and repeat deal and is open to evaluating a manufacturing warehouse similar to the cross dock manufacturing warehouse. After the call spend your time searching for deals that meet his criteria. You’ll likely start with what’s on the market only to be frustrated by the asking prices but it’s a starting place. You’ll need to call owners off market only to be yelled at. But hey maybe you get lucky…you find a 25 acre site zoned retail but has industrial adjacencies and the comprehensive plan recommends industrial for the site - could be a potential opportunity for Jack’s industrial warehouse development program…you call the property owner and you introduce yourself as a developer (some people will not agree with this because you’re in effect showing your cards as a buyer who is willing to pay top dollar and it puts you in a shitty negotiating position but I don’t agree with that…you want the property owner to know that you’re a developer because it will entice him to think about selling..he’ll think big dollar signs), and ask what’s his plans are for the property. He says he’s thought about selling his big shopping center retail site because the tenants leases are about to come due and they aren’t going to renew. You have a fish..tell him you’d like run a land valuation and circle back in a couple days with an offer. He says he’s open to hearing an offer. You thank him for his time. After the call you immediately call your civil engineer who you have a relationship with..you tell him that you have a potential deal but it’s not tied up and you make him sign a non-disclosure. You engage the civil on a spec basis cus you’re broke..but he’s invested to give his time cus he knows he’s a strong candidate to be awarded the contract as the civil engineer. At this point in time all you want him to uncover is the site/project constraints…site access, utilities, topo, drainage, and easements..site civil information that will impact and/or have an influence on your building footprint. Once you have this information. You call your land planner who you have a relationship with. You mention you have a potential site..you send him a non-disclosure. You setup a call with the civil and the land planner..talk through the site constraints and you ask the civil to send the land planner the CAD base file and ask the land planner for a land plan (communicate development program/product type) The land planner will review the jurisdiction’s land development code and will testfit and mass the site. You receive the land plan..it’s coming to life. You run the financial model and get to a 6.75% YOC…holy shit…not so fast you need to receive preliminary estimates from your consultants, your GC, and you need to talk to a capital markets broker who places debt and equity for development projects to understand the cost of capital and you need to talk to a tenant rep broker to understand rents in the immediate area..you do all this so your assumptions are all in check..and have some level of credibility (correspondence is huge). You revisit your model to tweak your assumptions for more accuracy..you’re now at a 6.5% YOC @ $8 PSF for the land. You submit your offer @ $7.50 with $25k refundable earnest money deposit and $50k hard at feasibility period expiration with a 180 feasibility period and 30 days thereafter to close (DD, entitlements, capital commitments) Property owner retrades you at $8psf. You both execute and rollover to PSA negotiation..you get a real estate attorney specializing in PSAs to run conflicts…you negotiate..you sign..deposit the refundable earnest money you get the site under control..you receive the title commitment, you get the ALTA Survey, the site investigation report (civil), the ESA phase 1, the geotech report, you have a meeting with the city to understand entitlements path and associated checklist items, you update your budget and timeline in the model, you get your civil to do some preliminary detention modelling, land planner refines the land plan, you update the model, you run demographics specific to industrial development…you assemble your findings in an investment committee package. You send the non-disclosure to Jack. You setup a follow up meeting with Jack via Microsoft teams. You present the IC package. He asks technical follow up questions..you deliver credible responses and address risks. He says he’s interested..you tell him “that’s great news Jack I’ll send you you the JV term sheet after the call”
I think you forgot a few details here, this is girthy and excellent.
You do know you can hit “enter” on your keyboard, right?
Its very tough. Maybe the toughest time to raise institutional capital in the last decade. I am living it right now, recently having gone off on my own, and despite putting together a couple incredible deals, they're still not good enough. I don't think it's just the deal, it's also the return profile. People want opportunistic returns for a value add/core-plus deal which doesn't exist. You need a special sauce/story.
Special sauce / story may be biggest key of all mentioned. Everybody is going to be putting deals that fit or are close to fitting return profiles in front of investors - which is just not good enough to land institutional investments right now.
A rich father
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