	RAINMAKER MARKETING CORPORATION 281.537.1200

Financial Investment Leverage...

Sometimes when Rainmaker Marketing Corporation gives a structured finance presentation or due diligence presentation on behalf of a given client, the client gets lost in the jargon of the industry. The purpose of this page is to better define these terms for the benefit of clients and the public.

One of the most common terms is really a concept and not a term, per se. Financial investment leverage is a three-part concept:

	How much financing are we talking about?
	How much of the financing does the client have to put up?
	How does this amount relate to the rest of the capital funding plan structure?
	How much of the future enterprise does this investment control?

To understand the term and the concept analyze a basic commercial finance transaction. We'll use the classic multifamily housing capital financing structure to illustrate...

Boudreaux is developing a $20,000,000 Class "B" multifamily rental housing project. Boudreaux decides to go the HUD route because, "HUD offers a 90% LTV ratio," and that provides $18,000,000 of the $20,000,000 in financing. This means Boudreaux only has to put in $2,000,000, right? Well, it doesn't work out that way and the real amount Boudreaux has to put into the deal is more like $3,000,000 because of the carrying costs and other HUD requirements. At the $2 million level, he was getting the leverage of 9:1 - every dollar he put up is being matched with $9 of bank financing. When it went to $3 million, his leverage dropped to 5.6:1 - every dollar he put in only leveraged $5.6!

So, now that we know the terms of the deal, let's look into the financial investment leverage. When the deal was first proposed, the property was expected to throw off a net of about $350,000 per year to Boudreaux's $2,000,000 investment; that works out to a cash-on-cash return of 17.5% per annum. Not the highest, but not chump change either. But in reality, a total of $3,000,000 in at-risk capital actually went into the transaction and that changed the financial investment leverage and the return. Now the cash-on-cash return is only 11.67% per annum. Boudreaux could get the same leverage by buying S&P depository receipts (back when the public stock exchanges weren't a fool's paradise).

Financial investment leverage can be created using a whole host of entitlements to further reduce the at-risk capital contributions the developer would otherwise make. Suppose there was a tax credit that ended up providing $1 million. Boudreaux's investment is back to $2 million and the tax credit investor is getting his/her return based on the tax credits. Boudreaux gets his original deal back. That's how financial investment leverage can be modified to help a developer achieve all the success they can stand.

Financial investment leverage is a function of the structure of the transaction - not necessarily the type of security being offered. For "street" investors who have no special acumen when it comes to commercial real estate investing, the following issues need to be understood:

	Market. How much market risk exposure is there in this deal? What does this mean in dollars and cents? What if there is a slower-than-expected lease-up period or a massive construction delay? Is there any reserve for these types of contingencies?
	Construction Risk. Is there going to be any substantive construction to be undertaken? What is the exposure of the investors to cost overruns and delays? What about extra working capital requirements? Are there any teeth in the construction contract (i.e.: protections for the investors in the contract)?
	Transaction. What's the holding period for the investment? What's the projected cash-on-cash yield for the projected holding period? When are dividends to be paid? Who decides when and how much? What happens if management does a poor job? What special risks or considerations need to be understood?

Do You Know The Secret?

When it comes to commercial real estate development finance, it doesn't matter whether you need to raise $5 million or $50 million, the out-of-pocket costs, advance fees and project due diligence costs will always require the same relative investment dollars the promoters have to fund. Do you know what that amount is? Do you know the Secret?

Rainmaker Marketing Corporation can trace its history back all the way to 1989. Incorporated in 1993, Rainmaker Marketing Corporation has evolved over time into a full-service business to business consulting firm. Rainmaker Marketing Corporation’s initial specialization was in issues and documentation needs corresponding to the capital funding cycle for commercial real estate development projects with a primary focus on senior housing and health care related properties. Today, Rainmaker Marketing Corporation serves all types of commercial income-producing property development program financing requests with a combination of feasibility studies, due diligence services, structured finance consulting and a focus on commercial real estate syndication services. Rainmaker Marketing Corporation’s service area includes all of the continental United States, Canada, Mexico and the Caribbean Basin.

281.537.1200

Email: consultants@rainmakermarketing.com

Commercial Real Estate Development Finance, Due Diligence Documentation, Syndication & Project Management Consulting

15519 Dawnbrook Drive, Houston, Texas 77068.