Commercial Real Estate Development Capital Financing - Syndications, Joint-Ventures & Consulting FAQs

Here are the most common Frequently Asked Questions (FAQs) pertaining to capital financing, Rainmaker Marketing Corporation's role, Rainmaker Marketing Corporation's capital financing services, the risks associated with various capital financing programs, the costs of obtaining capital financing and the uses of funds:

1. How does Rainmaker Marketing Corporation raise money for commercial real estate projects?

2. What do developers need Rainmaker Marketing Corporation to do that they aren't already doing themselves?

3. What costs must the developer (or project sponsor, as the case may be) absorb in order to obtain construction financing?

4. What risks must the developer accept in order to obtain construction financing?

5. What are the advantages of the EB-5 program?

6. What are the advantages of the commercial real estate syndication?

Answers...

Here's the answers to those burning FAQs...

How does Rainmaker Marketing Corporation raise money for commercial real estate projects?

Rainmaker is a consulting company and not an investment banking firm; only investment banking firms raise capital funding.  Rainmaker will help you create a joint-venture (and refer you to a law firm that represents foreign nationals seeking to participate in these joint-ventures) and help you complete the due diligence documents necessary to support your capital financing proposal.  Rainmaker will help you create, administer, manage, market and close a commercial real estate syndication sales plan but we are not commercial real estate brokers.  If you want a syndicator, then go hire one and take your chances.  Come to Rainmaker when you need a syndication plan, a syndication marketing plan, or help managing/administrating/selling-out a self-administered commercial real estate syndication.  No matter which route you chose, there is no such thing in commercial real estate financing as a "guaranteed financing" or financing you can obtain without incurring some financing result; neither beast exists and only fools chase these mythical beasts.  Back to top of page.

What do developers need Rainmaker Marketing Corporation to do that they aren't already doing themselves?

Rainmaker provides third-party reports to sustain the material representations the developer makes regarding the project.  The developer claims there is market acceptance for the project and the commercial underwriting standard is to prove it using an independent source that has no conflict-of-interest; Rainmaker provides market feasibility studies.  If you don't have expert level capital budgeting skills and/or structured finance knowledge (or the reporting software to create said structured finance presentations) then you should have Rainmaker prepare your capital finance presentation.  While you are still fooling around with it we are on to the capital finance plan and starting down the capital finance solicitation cycle track.  It's about saving time, because time is the most expensive commodity the developer has to spend.  The carrying costs of the project start adding up (especially those soft money site control due diligence periods) and most developers have good opportunity presentation skills, but limited skills in the other areas.  Rainmaker provides the reporting and development management support developers need to respond quickly to requests for additional information generated by prospective lenders, investors and regulators and keep the project on the quickest possible timetable.  If you had all of these skills then you wouldn't be reading this page.  Time to talk to us and see what can be done to help you get your project over the pre-construction phase capital finance hump as that is what we help developers do and the value of this service is incalculable when you have YOUR money and YOUR future on the line.  Back to top of page.

What costs must the developer (or project sponsor, as the case may be) absorb in order to obtain construction financing?

The developer (or developer group, as the case may be) must have sufficient capital funds available to them to complete the pre-construction phase project tasking.  This includes all of the due diligence reports, third-party reports, architectural designs, engineering reports and designs, construction reports and estimates, marketing and property management plans (click here and download the standardized institutional underwriter's due diligence checklist for new construction projects), together with all the project team information.  Nobody will furnish this information for free and Rainmaker will not help you assemble, review, revise and manage this process without being paid either.  In addition to these costs the developer must have the capital funds necessary to defray the carrying costs of the project over the pre-construction phase and pay the costs of obtaining site control and obtaining the necessary entitlements for the intended use of the property parcel.  There will also be significant legal, accounting and tax related consulting services and none of these are provided for free either.  If you don't know what these costs are going to be for your project then you can have Rainmaker conduct an initial due diligence review.  This costs between $500 and $5,000 to complete and provides a complete budget, project key milestone schedule and initial owner's program to get you started and no we will not wait to be paid to do this work.  In the commercial real estate development finance sector, everything is cash and carry.  Nobody will generate work for you and then hope you will pay them; only fools do that and there just aren't many of those left around.  Back to top of page.

What risks must the developer accept in order to obtain construction financing?

The developer (or developer group, as the case may be) must always accept the risk of a 100% loss of investment of all funds and commitments made in any program.  In gangbuster economies some of the risk is absorbed by some of the participants (as money is flowing), but in tight economies nobody really accepts any substantive risks when it comes to commercial real estate development transactions.  The most common risks that developers disregard are the financing risks, market risk and completion risks.

The financing risk is the risk the costs spent on due diligence activities will be lost because the developer runs out of capital funding before the developer is able to acquire additional rounds of financing to sustain the project.  The most common manifestation of this risk is seen in cases where the developer tries to skimp on the due diligence documentation costs and requirements and attempts to "paper over the holes" with a stronger market opportunity presentation.  This only works in about 1 in 50 cases.  Commercial real estate development requires sufficient capital funding to pay the costs of due diligence documentation, site control, entitlements, design, engineering, marketing, operations, construction and financing costs of the project through the entirety of the project's pre-construction phase.  If you have insufficient capital for this task then your project will fail and you will be financially responsible for the failure.

The market risk is the risk the ultimate risk the project will not garner sufficient ongoing sales revenues to sustain the project past the point where the capital financing support ends.  If you have a weak market, weak market feasibility forecast or you have chosen to disregard material limitations set forth in the market study then you are taking the market risk exposure and the mortgage lender will find a way to make the losses your responsibility.  Equity capital partners will find a way to claim investment fraud and you will be made to be responsible for their losses as well.

Ultimately, you will be responsible for the on time and on budget completion of the construction and development of your project.  You may be - to one degree or another - insulated from this loss by the bonding provided by the contractor, but you will likely be in bankruptcy court before you can successfully prosecute your rights under those bond agreements.  If you have second dollar change order cost claims, then you will also be exposed because of your own stupidity and the investors and lenders will make you pay everything you have before they let go of a single dollar for a second dollar change order cost claim.  Your failure to properly structure your development program will create your completion risk exposure.  Back to top of page.

What are the advantages of the EB-5 program?

The EB-5 program offers equity replacement financing for developers.  It is important to understand this is replacement financing; you spend the money necessary to get the project through the pre-construction phase and then if you are successful those outlays are reimbursed to you at the closing table.  There is no program out there that advances pre-construction phase capital financing - you must have the cash resources or commercial credit available to you or you will fail.

The EB-5 program may offer a higher degree of certainty of outcome because the prospective investor participants are foreign nationals who are seeking to obtain permanent residency in the United States, so they motivated beyond the simple considerations of economics pertaining to the subject transaction itself.

The EB-5 program offers a low equity dilution for the developer - 20% and the developer that follows the rules ends up refinancing the project in five (5) years and owning 100% of the deal subject only to the mortgage financing then in place.  That's pretty hard to beat.

The pre-construction phase capital funding budget necessary to close a deal under the EB-5 program can be as little as $500,000.  The minimum joint-venture funding is $5,000,000 so the pre-construction phase budget can be as little as 10% of the total deal.  There are very, very few capital funding deals out there that allow the developer to obtain non-recourse new construction capital financing with only 10% capital at risk by the developer for a limited period.  Back to top of page.

What are the advantages of the commercial real estate syndication?

The commercial real estate syndication offers equity replacement financing for developers.  As with the EB-5 program, you must understand this is equity replacement financing; you spend the money necessary to get the project through the pre-construction phase (including the syndication process itself) and then if you are successful those outlays are reimbursed to you at the closing table.  There is no program out there that advances pre-construction phase capital financing for development; you must have cash or commercial credit.

The commercial real estate syndication can be contrived to have a high degree of certainty of outcome (using the overkill marketing method) as is pointed out in our commercial real estate development finance and syndication white paper (click here and download a complimentary copy of it).  The syndication route (at least as far as the overkill marketing method is concerned) represents a defined path to funding for the savvy developer as the commercial real estate syndication can be closed prior to the closing of any construction mortgage financing, making the commercial real estate syndication (effectively) the developer's fall-back mezzanine financing option that should be programmed into the development budget from Day 1.

The typical commercial real estate syndication financing package is designed to give the developer "patient" capital financing that is non-recourse in nature and can be used as the bargaining chip to entice a reluctant lender to provide construction mortgage financing on a non-recourse basis.  Back to top of page.

About Rainmaker...

Rainmaker Marketing Corporation is the brainchild of Clint Lovell, a seasoned business finance consultant with more than 20 years experience.  Rainmaker is a B2B consulting firm that was incorporated in 1994 for the purposes of providing market feasibility studies to businesses seeking capital financing in the commercial and institutional markets.  Today, Rainmaker Marketing Corporation provides a comprehensive array of due diligence documentation services for most major industry groups.  Rainmaker Marketing Corporation also provides syndication management services for fractional commercial real estate syndicates that can provide mezzanine gap funding for income-producing commercial property developments as early as the pre-construction phase.  Rainmaker Marketing Corporation serves clients throughout North America and the Caribbean Basin.

Rainmaker Marketing Corporation, Inc.

15519 Dawnbrook Drive, Houston, Texas 77068

281.537.1200  

consultants@rainmakermarketing.com