I am currently a Regional Director of Financial Consulting at a large international commercial real estate brokerage firm, but would like to go out on my own as a sponsor / promoter of real estate partnerships. The types of transactions that I am accustomed to working on in my current position are all large, institutional deals and the deals I would be pursuing in this new pursuit will likely be smaller (under $5-10M). The investment opportunities that I would like to pursue would largely be value added / rehab projects for office, retail, and multi-family properties.
Before I make this career change, I want to make sure that I will be able to line up a reliable source of debt and equity / mezz financing for my acquisitions. My net worth is roughly $250K of which $100K is liquid (stocks, money market, etc....) and outstanding credit (750+). I have private investors with approximately $2M to invest with me. One of these investors with a net worth of approximately $1.5M is willing to go on a recourse loan with me. The other investors have a combined net worth over $10M and I am sure they would be willing to go on the loan if it is non-recourse or limited recourse. I know that banks generally like to see a net worth roughly equivalent to the loan and that the loans are typically full recourse. Given these circumstances, am I limited to pursuing deals with total consideration under $1.75M or are there other debt sources that will bend on the net worth or recourse provision?
Full Version: Getting Started as Sponsor / Promoter
You are venturing in to a rather complicated arena. The sources of funds are there and they will always be there as long as you can pay the interest and if you qualify. The qualification part would be the nec experience, conncections (contractors etc) and credit worthiness and equity. The other important thing would the area that you choos eto participate it. Where are you looking to get involved geographically? I would highly reco that you dabble with smaller projects i.e rehab and rennovations for $450K-$1.5M. I come across many small commercial projects that are rehab projects that we dont do which i think would make sense for a equity investor/contractor to either flip or have an equity stake in.
Here is my feedback:
"… alue added / rehab projects for office, retail, and multi-family properties…" The lender reads that as "higher risk without the debt repayment being there"
"… The other investors have a combined net worth over $10MM…" Net worth is good, but the most important factor other than debt repayment is the amount of equity "in the project", which is substantially higher for vacant or in disrepair properties.
Remember that income producing properties derive their value in great part from the income approach, which means that high vacancies lower the value of a property.
Commercial real estate lending is very property/deal specific.
"… alue added / rehab projects for office, retail, and multi-family properties…" The lender reads that as "higher risk without the debt repayment being there"
"… The other investors have a combined net worth over $10MM…" Net worth is good, but the most important factor other than debt repayment is the amount of equity "in the project", which is substantially higher for vacant or in disrepair properties.
Remember that income producing properties derive their value in great part from the income approach, which means that high vacancies lower the value of a property.
Commercial real estate lending is very property/deal specific.
I have a lot of experience working on large ($20-200M) commercial real estate acquisitions, dispositions, lease negotiation, and deal structuring as a consultant, but not as a principal. Let's assume that I will be working with an experienced architect and construction firm.
I would be looking to fund the deals with an 80-90% loan-to-cost construction loan with a 24-36 month term. The remaining 10-20% would be funded by private equity investors. I would personally invest 1-5% of the equity which would be partially funded by an upfront commission / acquisition fee.
Clearly the business plan will have to be supported by reasonable construction and market assumptions that project an end value for the property sufficient to take out the construction loan via permanent financing and to allow for profit to the equity investors.
Given this information and the information from my previous post, is it possible to get a non-recourse or a limited recourse loan? If so, under what circumstances? These questions are important because if I can get non-recourse or limited recourse I can easily generate sufficient net worth to go on the loan that will be greater than the loan amount on a $5-10M project.
If non-recourse or limited recourse are not an option, is it possible to get this type of loan if the net worth of the individuals on the loan is less than the loan amount? If so, what would be the minimum (as a % of the loan amount) that could be acceptable to a lender?
I am trying to define a doable deal size based on my current situation and develop an understanding so I can adjust this figure as my circumstances change. Any help will be greatly appreciated.
At this point, I don't want to talk about my geographic location because I do not want my current employer and clients to know that I am contemplating this move, but I will be happy to speak offline with anyone who has a loan program that is a good match for my situation.
Thank you in advance to anyone that contributes to this thread.
I would be looking to fund the deals with an 80-90% loan-to-cost construction loan with a 24-36 month term. The remaining 10-20% would be funded by private equity investors. I would personally invest 1-5% of the equity which would be partially funded by an upfront commission / acquisition fee.
Clearly the business plan will have to be supported by reasonable construction and market assumptions that project an end value for the property sufficient to take out the construction loan via permanent financing and to allow for profit to the equity investors.
Given this information and the information from my previous post, is it possible to get a non-recourse or a limited recourse loan? If so, under what circumstances? These questions are important because if I can get non-recourse or limited recourse I can easily generate sufficient net worth to go on the loan that will be greater than the loan amount on a $5-10M project.
If non-recourse or limited recourse are not an option, is it possible to get this type of loan if the net worth of the individuals on the loan is less than the loan amount? If so, what would be the minimum (as a % of the loan amount) that could be acceptable to a lender?
I am trying to define a doable deal size based on my current situation and develop an understanding so I can adjust this figure as my circumstances change. Any help will be greatly appreciated.
At this point, I don't want to talk about my geographic location because I do not want my current employer and clients to know that I am contemplating this move, but I will be happy to speak offline with anyone who has a loan program that is a good match for my situation.
Thank you in advance to anyone that contributes to this thread.
JT, bulk of my experience is with small commercial ($500K-$4MM) deals where the deal dollar size is smaller, the project is less complicated and the turnaround time on the project is faster, not to mention a bigger pool of contractors/agents that can handle the smaller projects. Even with small commercial I have a staff/network of people I have been dealing with for years that can get come thru. The larger the deals get the more complicated the underwriting process and the longer it takes to kick the tires. If you know the business then I would encourage you to venture out on your own, but armed with the proper tools; a staff/network of people who you can count on in addition to someone who know the lending landscape. Resources to tie you over i.e source of funds to fund your activities for the 3-7+ months it takes to close a big deal (average). Plus a few other thing which would probably sound redundant at this point…
As the admin said, commercial financing is very deal specific. Lenders are very specialized and will only fund brackets on loan sizes i.e $2-10M or $20M+. From what I have seen the larger loans are non recourse (On a $50 million dollar loan it doesn’t make sense to have a full recourse loan on an individual whose net worth is $300K – It’s the project equity that counts). Again, my advise would be to get your feet wet with some smaller projects where you make less, but the return is faster, the risk is lower and there are more of that you can get involved in. Also, all the stats I have seen so far only indicate that small commercial is growing more rapidly, where as the pie is still relatively the same size for the larger commercial projects (framed within the context of economic growth and number of dominant players out there).
If you would like email me and I throw a few other ideas at you. Thanks. Naj
As the admin said, commercial financing is very deal specific. Lenders are very specialized and will only fund brackets on loan sizes i.e $2-10M or $20M+. From what I have seen the larger loans are non recourse (On a $50 million dollar loan it doesn’t make sense to have a full recourse loan on an individual whose net worth is $300K – It’s the project equity that counts). Again, my advise would be to get your feet wet with some smaller projects where you make less, but the return is faster, the risk is lower and there are more of that you can get involved in. Also, all the stats I have seen so far only indicate that small commercial is growing more rapidly, where as the pie is still relatively the same size for the larger commercial projects (framed within the context of economic growth and number of dominant players out there).
If you would like email me and I throw a few other ideas at you. Thanks. Naj
”… of the equity which would be partially funded by an upfront commission / acquisition fee.” 
You truly are a financial professional….
”…. Given this information and the information from my previous post, is it possible to get a non-recourse or a limited recourse loan? If so, under what circumstances?” The answer is…. it depends
There are a lot of factors involved here. To begin with, you will not find a bank lender that would go 90% LTC on a rehab project. I have never seen the number that high. The following are some additional thoughts.
1- What is your definition of limited recourse? If the definition of limited recourse is that the person providing 80% of the equity contribution is responsible for 80% of the loan, then it may fly with the other two investors liable for the whole amount. Then again, it depends because some lenders are very strict about this, and I have seen the guarantee requirement enforced on some individuals worth $100MM.
2- ”… if I can get non-recourse or limited recourse I can easily generate sufficient net worth to go on the loan that will be greater than the loan amount on a $5-10M project” That means nothing to the lender if he can not go after it.
3- ”…. is it possible to get this type of loan if the net worth of the individuals on the loan is less than the loan amount?” It depends on the lender. I know some individuals that would not consider it, but others might depending on the strength of the project.
4- Non-recourse is given very sparingly to select individuals by bank lenders. Non bank lenders might be more willing, but they also price those products accordingly and are not as regulated as we are. I would not expect 90% non-recourse financing from them either.
5- Most projects with significant construction are done by bank lenders as we have the expertise and staff. Most non-bank lenders are in the business of permanent financing.
Good luck
P.S.: This situation reminds me on the comment that one of the approving officer would make every time that a non-recourse loan would come to committee at a previous employer. He would always say to the sponsoring officer. “Joe why do you always want to make me dance with the ugly girl, when I want to dance with the pretty girl”. He would say that in spanish and it sounded really funny.
You truly are a financial professional…. ”…. Given this information and the information from my previous post, is it possible to get a non-recourse or a limited recourse loan? If so, under what circumstances?” The answer is…. it depends
There are a lot of factors involved here. To begin with, you will not find a bank lender that would go 90% LTC on a rehab project. I have never seen the number that high. The following are some additional thoughts.
1- What is your definition of limited recourse? If the definition of limited recourse is that the person providing 80% of the equity contribution is responsible for 80% of the loan, then it may fly with the other two investors liable for the whole amount. Then again, it depends because some lenders are very strict about this, and I have seen the guarantee requirement enforced on some individuals worth $100MM.
2- ”… if I can get non-recourse or limited recourse I can easily generate sufficient net worth to go on the loan that will be greater than the loan amount on a $5-10M project” That means nothing to the lender if he can not go after it.
3- ”…. is it possible to get this type of loan if the net worth of the individuals on the loan is less than the loan amount?” It depends on the lender. I know some individuals that would not consider it, but others might depending on the strength of the project.
4- Non-recourse is given very sparingly to select individuals by bank lenders. Non bank lenders might be more willing, but they also price those products accordingly and are not as regulated as we are. I would not expect 90% non-recourse financing from them either.
5- Most projects with significant construction are done by bank lenders as we have the expertise and staff. Most non-bank lenders are in the business of permanent financing.
Good luck
P.S.: This situation reminds me on the comment that one of the approving officer would make every time that a non-recourse loan would come to committee at a previous employer. He would always say to the sponsoring officer. “Joe why do you always want to make me dance with the ugly girl, when I want to dance with the pretty girl”. He would say that in spanish and it sounded really funny.
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