By Zack Markwell, Co-Founder of Stonemont Financial Group
Since 2010, real estate developers have benefited from an aggressive lending market combined with a falling cap rate environment. This has generated an increase in interest and competition in build-to-suit and speculative development. For developers to be successful in our current competitive financial markets, they must take more risk with their capital in an attempt to win new opportunities.
Developers are forced to take increasingly higher risks in pricing build-to-suit projects on the front end, as cap rates reach all-time lows. However, developers can successfully seek and execute new development business without having to risk more of their capital by pushing much of the risk to experienced capital providers.
Why partner with a capital provider
By partnering with an experienced capital provider, developers can focus on managing the cost and execution side of new projects and allow the capital provider to use its expertise in pricing, transferring the risk of future cap rates to the capital provider. Whether this transfer of risk is structured as a forward takeout or a full funding from closing, the capital markets burden is removed from the developer.
Capital sources spend 100 percent of their time focused on the economic drivers of real estate pricing. Developers can leverage this expertise allowing the capital source to focus on its strengths while the developer focuses on the actual real estate. This tactic allows for the most competitive all-in proposal.
One of the greatest benefits of partnering with the right capital partner is the ability to pursue more potential opportunities. Leveraging the financial strength of a capital partner allows the developer to increase deal flow. By not having equity or debt capacity restrictions, the developer is able to pursue more deals that generate fee income without putting capital at risk. A capital partner will provide any lender-required financial guarantees as well, which protects developers from taking on this added liability.
Along with an increase in deal flow, experienced capital providers can expand developers' networks by making introductions to top firms in the industry. These connections can include general contractors, property managers, etc.
Today, developers who are still relying on their own internal capital and potentially stale market knowledge are at a disadvantage to competitors who take this approach. However, developers who are looking to take advantage of strategic capital partnerships need to take the time to find the capital source that is right for them.
How to choose the right partner
Today, tenants and tenant representatives are selecting developers and pairing them with an all-inclusive capital source. By forming this type of partnership in the beginning, developers can likely avoid a forced “marriage” of capital. As developers look for a capital provider, they should see them as a long-term partner instead of as a quick capital source for one–off deals.
Keeping this in mind, developers should watch out for "capital sources" that lack balance sheets. These types of firms leave the developer without the certainty of execution that they thought they had because they are typically waiting to win the developer’s business before they go out and find the capital. This can put the developer’s reputation at risk.
As developers search for their right capital provider, they need to make sure their capital source has a strong track record of success and experience in complex financial transactions. Ask to see their portfolio and discuss the most recent deals they have closed.
What the ideal partner looks like
Developers’ ideal partners have strong experience in both debt and equity real estate capital markets. Having a firm that specializes in both, allows developers to pursue more deals and create fee income. Strong capital firms will demonstrate creativity when solving complex financials problems as well.
It’s important to note that ideal capital partners will rely on the developer's expertise in development matters. Firms that try to be both developer and financial partner can create conflict and tension with developers. This is often counterproductive to the success of the project.
Partnering with an experienced capital provider allows a developer to continue to acquire new business without the inconvenience or unnecessary risk of fronting their own capital, regardless of a less than ideal market.
Zack Markwell is the co-founder of Stonemont Financial, a national real estate investment firm specializing in providing capital for single-tenant build-to-suit developments and sale-leasebacks, as well as student housing investments. Zack has more than 15 years of experience in real estate investment banking and providing developers with a full platform of capital raising products and build-to-suit financing.