Starting our own shop and need some suggestions

Ok, so another co-worker and I are going out and starting our own acquisition shop. We've been each in the industry for 10+ years. We have a pretty good plan in place and have found some attractive opportunities. Our biggest issue is that we don't have a reliable equity source yet. Most family office, funds, etc need to know we have control of a deal by having an executed PSA. Obviously this makes sense and we can't try and fund a deal without it. The problem is getting to an executed PSA.

In short, I wanted to get suggestions on how we can get a PSA executed without risking deposit in the event we can't close. Its very tough to convince sellers/brokers to accept an offer with a financing contingency in this market especially if the deal has legs. Especially if the deal is publicly marketed with a deadline plus its worse with a larger institutional seller. I have a deal right now thats $50M+ and underwrites very well. Problem is the EMD needed is about 1% of the PP and seller is a large fund. They are not willing to accept a financing contingency. Another deal which was solid we had a seller that gave us a financing contingency for 20 days as part of our 30 day DD period. After 20 days, the EMD goes hard. Problem is in 20 days I can probably get a lender commitment, but equity providers take a much longer time. Our equity relationships have stated they need a few weeks to review the deal before they can decide.

TLDR - Best ways of getting a PSA executed so we can go out and try and raise the equity.

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Comments (20)

Mar 25, 2022 - 4:01am
vfruit0425, what's your opinion? Comment below:

This is a common problem syndicators run into. It's always more feasible to have a fund, as you can facilitate the pursuit costs with no issue.

My suggestion is to not put the cart before the horse. You need to establish reliable relationships with capital providers before you hunt for deals. There is a chance you may have to walk away from the deal and utilize it as a learning experience.

Explain your strategy, track record, and investment criteria beforehand so they can move swiftly when you present a deal. Some firms will still reject your deal or take considerable time to underwrite the transaction but your odds greatly improve.

"Find a good deal and the money will come" is a MYTH.

CRE is heavily relationship based, arguably higher than traditional finance.

P.S - I run a Co-GP/LP equity fund, PM me your equity request and a brief scenario of the deal.

Mar 25, 2022 - 7:26am
rickle, what's your opinion? Comment below:

After 10 yrs, you must have relationships that believe in you, trust your acumen and deal sense. You'll need them to finance until you can point to actual successes. I'm sure you have experience with wins while working for your current / previous employer. Leverage that. Explain your role and how you can do that again. Knowledge of the market, trust, etc.

Controversial
Mar 25, 2022 - 10:11am
Ozymandia, what's your opinion? Comment below:

I don't understand.  You've been in the industry for 10+ years and you never realized that one of the major barriers to entry is having capital?  Or that you'd have to put down a deposit to tie up land?  What the hell were you doing for the last decade?

Guess what?  Developers make money because they take risk.  In this case, deposit risk.  Or are we going to see you back here in 6 months asking about how you can get a construction loan without putting up bad boy and environmental and completion guarantees, because there is a chance you don't finish the project?

  • VP in RE - Comm
Mar 25, 2022 - 10:31am

Umm yes I understand its a major barrier. We know we need to raise it. I didn't ask how to get capital, I am asking best ways to structure a deal while we do a raise. Im asking for advice because I know some of you have gone through this process. The fund I work for is established with a decent balance sheet. Also throughout my years, I have been consulting with multiple equity providers on this. They have all told me to try and get control of a deal and then bring them the deal. I've reached out to sellers as well and asked about implementing financing contingencies and some are willing to give me a short amount of time, but not enough where the deal is tied up for so long without any guarantees to them. Most of our equity relationships wont even have a discussion if I dont have a deal, not because they don't care, but because they can only spend time on something that is actually under contract (which 100% makes sense).

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Mar 25, 2022 - 10:40am
Ozymandia, what's your opinion? Comment below:

Umm yes I understand its a major barrier. We know we need to raise it. I didn't ask how to get capital, I am asking best ways to structure a deal while we do a raise. Im asking for advice because I know some of you have gone through this process. The fund I work for is established with a decent balance sheet. Also throughout my years, I have been consulting with multiple equity providers on this. They have all told me to try and get control of a deal and then bring them the deal. I've reached out to sellers as well and asked about implementing financing contingencies and some are willing to give me a short amount of time, but not enough where the deal is tied up for so long without any guarantees to them. Most of our equity relationships wont even have a discussion if I dont have a deal, not because they don't care, but because they can only spend time on something that is actually under contract (which 100% makes sense).

Except all of this is not germane to the point - you're asking how to do a risk free deal, which anyone with 10+ years of experience should know isn't really how this works.  Why anyone should give you seller financing just to make it a little easier for you to make a risk-free return is beyond me.  Put up your own money.  This is why you make a big promote on the back end - because you're taking.

The obvious answer, given all that, is to sacrifice your upside for high risk deposit capital.  Go tell someone you'll give them 50% of your promote if you close on the deal, in return for that 5% deposit.  Don't like the sound of that?   Well, no one does, but I also don't see any reason why a partner would shoulder all the riskiest pieces of the deal and then let you have all the ups.

Mar 31, 2022 - 3:09pm
Ozymandia, what's your opinion? Comment below:

Just an observation, but damn, you're always so combative. Who hurt you lol

The realization that the world is full of stupid people who think they're smart.  And worse yet, the fact that we tolerate idiots and actively encourage them.  If more people understood that no, they're not geniuses and no, they don't deserve success merely because mommy and daddy told them so, the world would be a better place.

I see no reason to be polite to someone making a dumbass comment.  Stupidity should be called out, lest it be mistaken for something else.

  • Analyst 2 in RE - Comm
Mar 25, 2022 - 11:40am

Also, chiming in and sorry if you thought of this. Bring them a deal with the proposed terms to execute on a Cost Sharing Agreement to split 50/50 pursuit costs and deposits until a venture / debt is finalized at closing (allows you to proceed with executing PSA and funding intial deposit). Good faith negotiation on JV through diligence/closing. 

Such that the At Risk Deposit is non-refundable subject to the terms of the PSA, the "electing party" (party backing out of the deal) shall reimburse the other party for their share of the At Risk Deposit.

Mar 25, 2022 - 1:47pm
C.R.E. Shervin, what's your opinion? Comment below:

If it is a home run, consider getting hard money financing. you will probably end up paying 15% plus 3% in points, but you can figure out a way to get a 6 month term with 2 extension periods, and 90% LTV.

I've written contracts that say deposit is refundable if during due diligence you find something.

Most Helpful
Mar 25, 2022 - 4:00pm
m_1, what's your opinion? Comment below:

Full disclaimer. Not in RE, but am familiar with ponying up cash for deals as an independent sponsor.

Like someone else said, it's critical to cultivate a base of capital that is ready to go. Sometimes even the most reliable people can bail last minute or ask for ridiculous amounts of time to run DD...which can blow up your deal. I would aim for roughly 6x - 8x verbal commitments. 

Would be careful trying to pounce on opportunities until the above is done, as you don't want to risk reputational damage. I've personally written far more into deals than I was comfortable with because an LP vanished and I didn't want to risk reputational damage. 

Good luck, and enjoy the entrepreneurial process. :)

Mar 29, 2022 - 10:13am
hillhopper, what's your opinion? Comment below:

+1SB - I worked for a small developer (syndicator) who was putting together a deal in late 2016. One of his larger investors (who happened to be Russian) that regularly invested about $1 million per deal for the past decade decided to opt out of the deal due to the uncertainty on how the presidential election would pan out. Just never know when stable capital providers might make a different decision.

Mar 30, 2022 - 9:18pm
i'd rather be skiing, what's your opinion? Comment below:

You've found deals that actual pencil in a market that's looking for placements.  Seeing some of these other comments even offering to take a look at the equity request/deal recap is awesome and should hopefully put some wind behind your back.  You guys will figure it out real quick and please give an update when you can 💪

Mar 31, 2022 - 7:34am
Danielplainview, what's your opinion? Comment below:

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