How do sponsors/developers with a sub $1M net-worth get deals done on the acquisition or development side of the business? Will be challenging to do a deal that is $20M due to liquidity constraint from a lender that requires a borrower to meet a certain liquidity profile. Would be great to know how syndicators or developers deal with this issue. Thanks!
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Have funded two deals off this same profile. Find an equity partner willing to flash their liquidity/balance sheet strength to help secure the debt. May or may not require a liquidity guarantee fee (anywhere from 75-100 bps) if the LP is signing up for a completion guarantee or other limited recourse carveouts.
echo the above...they're also a lot of different structures (recourse vs non recourse) that will have significantly different guarantee profiles that are required by the lender. Leverage relationships - tap into experience and knowledge from lender contacts and let them be the initial guide.
Co-GP???
I’m curious about this too. I was going to make a post about it but I’ll add my questions here. It sounds like having a co-GP or paying a fee to the LP to flash liquidity and meet the guarantee is a viable option. What about deposit requirements? How do low net worth developers navigate these lender requirements? It’s tough for the little guy to shell out one or two million bucks just to sit in a checking account for a year or two until the guarantee burns off at CO. Not to mention any partner putting up cash as a deposit (whether it be the sponsor/developer or a Co-GP or LP) has significantly watered down their returns now. Whoever puts it up will want to be paid at least the pref return for it I imagine?
You get a co-gp to sign the completion guaranty, sacrificing some promote to incentivize them, then you make a bunch of money and one day you won’t need them anymore. YMMV.
So you give them a piece of the promote for meeting the deposit requirement of the lender?
I don’t know what you mean by deposit. Typically the lender will require some sort of net worth / liquidity. For a more conservative institutional lender I’ve heard something like 125% of loan for net worth and 25% in liquidity, but this varies
I’m referring to a literal deposit in a checking account with the lender as a loan requirement. Here’s a rough example from a deal I’m familiar with: $50 million loan with a liquidity requirement of $10 million and a deposit requirement of $2 million. Sponsor has to maintain a $2 million deposit with the lender until a certain milestone (maybe CO? I don’t remember exactly). That $2 million is just sitting there doing nothing, earning no return. For big high net worth guys maybe this isn’t such a big deal. But for the little guy starting out I would imagine you’d try to do everything in your power to waive that requirement and just have net worth and liquidity requirements with no deposit requirements. Then you could get a Co-GP to sign and give him a point plus share in the promote for singing guarantees.
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