Builders and real estate developers have always great projects to be built. However, not all projects are a good fit for a specific market. Great developers are visionaries, and some of them are ahead of their time and that’s why we can enjoy beautiful landscapes that once were a dream.
The “idea” starts with a Developer’s vision of the future, then a great team of professionals must be put in place in order to make possible the transformation of a dream into a reality (engineers, architects, attorneys, general contractors, subcontractors, interior designers, management companies, financial institutions, marketing professionals, realtors, and many more). However, all projects have one thing in common: No matter how beautiful the project might be, the finance-side of it must be profitable.
As a former builder and developer and from personal experience, I can say that no matter how big or small a development project is, all projects require capital therefore they must accomplish the financial goals.
During the past few weeks, many new-construction projects were put on hold by traditional lenders (mostly banks) because of the COVID-19 and the uncertainty of the markets.
it has become increasingly difficult for builders and developers who rely only on traditional financing to get the capital they need to complete their projects, and this is where Institutions with Private Capital comes in.
Private Capital vs. Traditional Financing
While most Construction Loans are issued by traditional banks and financial institutions, Private Equity Firms can be a good source for Individual RE Investors
Same as Banks, the Private Capital Firms can make Construction Loans secured by the land and the project to be built. Although some of Private Firms might charge higher interest rates when compared with loans from a bank, other Firms offer different options with a diverse stock of Capital making this more attractive to all parties involved. Also, projects getting financing thru Private Firms will usually get funded in matter of days vs. traditional institutions (banks) that often take weeks or months.
Why successful builders/developers with a strong financial balance sheet, great backgrounds, and easy access to traditional loans (Banks) would chose Private Capital to fund their new construction projects?
Successful builders and developers understand that time plays an important role in the construction industry.
Funding a loan fast can often be the difference between failure or success of a project. Unexpected changes in the market cannot be easy anticipated (as the COVID-19) and this can be crucial for a builder/developer when deciding between Private Capital a traditional lender.
While most Private Capital Firms can fund construction loans within a week without stressing out, some banks often take 30 days to get approvals, plus additional 30+ days to get the funds builders need.
No doubts that good borrowers can get funds for their projects almost at any Bank. No doubts neither that Banks can provide Capital less expensive than Private Firms. However, most Private Firms have teams of experienced RE professionals in different areas.
What does it mean for the borrower?
Private Equity (PE) Firms invest their own Private Capital. They are fully invested in the success of the borrowers.
Since each project has many areas to be cover, PE Firms will provide additional underwriting (extra eyes) to the projects
PE Firms have a team of professionals focused on each project they invest
PE Firms are an excellent source of advice for the borrower
PE Firms often work with many RE professional teams such: Legal, Management, Marketing, etc.
PE Firms adapt and adjust faster than Banks. PE Firms are well-known for its ability to navigate thru different market cycles, and quickly adjust to it
No red tape
Quick response (usually withing 24 hours)
Funding can be under 7 days
No excessive paperwork
Are all Private Real Estate Funds Created Equally?
The answer is no. It can be tempting to get tunnel vision and focus only on funds that brought stellar returns in recent years, but managers play a huge role while analyzing performance and risks. When deciding investing on a Private Fund, it’s important to look at the Fund and how it’s performed over the last years, however it is more important to evaluate the experience of the Fund Manager.
Make sure you select a Fund Manager (and not a Fund) who has the character and capabilities to overcome situations during this market shift. Managers must have a strong strategy for these days, a well-seasoned asset management team, risk-management policies and procedures, a deep understanding of the market their serve as well as clear competitive advantages.
Investing in Private Funds is worth considering, however due to the different levels on how certain Private Funds are structured to generate returns for its investors, it is extremely important to go into the space with abundant caution. Many investors run their own process to select the best Private Funds and most of them focus on the character and resources of the Fund Manager, and not on Fund’ s past performance.