Financing a Commercial Real Estate Investment
United States · Member since 2013 · 26 posts · 0 votes
Financing a Commercial Real Estate Investment
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Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votesDeion Alaei, for most investors the difference between the loan and the total capital needed is the hardest component of the capital stack unless you have a lot of your own money and just fund the deal yourself.
For those that do not, finding investors is about the only way. While it is great that you have the loan already, and that the property is established and has great financials, the real test is YOU. Investors will want to see a viable property and strategy, but they also want the investment sponsor (you) to have a track record, and they have to trust you. If you have a track record and investors that trust you, then you just have to form some type of entity (usually an LLC) and have a securities attorney draft a private placement memorandum and related subscription documents and operating agreement, and you can admit your investors into the LLC in exchange for their capital (and some equitable division of the profits).
If you don't have investors, but do have a track record, you need to get out and network with people to find high-net-worth individuals that are seeking alternative investments. It's a bit of a needle-in-a-haystack, but that's how it's done...word of mouth. You can't advertise (yet), you just have to become known.
If you don't have a track record, you need to get one. This means doing whatever deals you can with the resources you have and build it larger and larger, the old fashioned way. As you do this, you'll meet investors along the way and build and develop relationships. These relationships will be very important as you grow, because these people will be your investors or will refer you to other investors.
9 Replies
- 13ySeth WilliamsPro MemberSpecialist · Grand Rapids, MI · Member since 2012 · 582 posts · 353 votes
I think Brian Burke might have some insight into this question.
- 13yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
Deion Alaei, for most investors the difference between the loan and the total capital needed is the hardest component of the capital stack unless you have a lot of your own money and just fund the deal yourself.
For those that do not, finding investors is about the only way. While it is great that you have the loan already, and that the property is established and has great financials, the real test is YOU. Investors will want to see a viable property and strategy, but they also want the investment sponsor (you) to have a track record, and they have to trust you. If you have a track record and investors that trust you, then you just have to form some type of entity (usually an LLC) and have a securities attorney draft a private placement memorandum and related subscription documents and operating agreement, and you can admit your investors into the LLC in exchange for their capital (and some equitable division of the profits).
If you don't have investors, but do have a track record, you need to get out and network with people to find high-net-worth individuals that are seeking alternative investments. It's a bit of a needle-in-a-haystack, but that's how it's done...word of mouth. You can't advertise (yet), you just have to become known.
If you don't have a track record, you need to get one. This means doing whatever deals you can with the resources you have and build it larger and larger, the old fashioned way. As you do this, you'll meet investors along the way and build and develop relationships. These relationships will be very important as you grow, because these people will be your investors or will refer you to other investors.
- United States · Member since 2013 · 26 posts · 0 votes13y
Brian Burke, Thank you for the response. It was very detailed and easy to understand. I am still a little confused on a couple of issues. The main thing being that if the property has professional property management in place, and if the entity itself would have experienced management in place, then why would it matter about my personal track record to an investor? Shouldn't a property thats big enough with a high enough price and financials be qualifying enough that financing can be determined based on it's own merits? I thought large established commercial properties that are big enough is more than enough to attract financing, as long as the deal and numbers make sense. Am I missing something? Thank you again for the response, and I very much appreciate it
- United States · Member since 2013 · 26 posts · 0 votes13y
Brian Burke I forgot to mention in my first response something else. Does it make a difference to the investor if I have a real estate team with a great track record? That includes a Realtor, Mortgage Broker, and Real Estate/Corporate Lawyer on my side. Does the quality and track record of the team behind the buyer inspire any further confidence or comfort in potential investors? I only ask because I'm genuinely curious and am trying to learn as much as possible. My partner and I have been trying to acquire a commercial property, and any further insight or education we can acquire for our existing knowledge would be of great additional help in our endeavor and journey.
- 13yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
Ultimately, the success or failure of any investment may very well depend on the experience and talent of the ultimate decision maker - the owner. Property managers manage the property - owners manage the asset! This means for example if market conditions change and a new direction is needed to keep the property profitable - it is the owner, not the property managers thaty must choose to implement the new direction.
- 13yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
Deion Alaei, Don Konipol answered perfectly. When you want to buy a property and have investors invest with you, they are investing with YOU. While it is critical that you also have an experienced team in place, you will be the one that makes the ultimate decision. It is you that will implement controls to ensure that the management isn't a bunch of thieves, it will be you that decides what price to pay, what to do if there isn't enough cash flow to service the mortgage, and it will be you that will chart the course for the entire investment period. Think of it this way, would you buy stock in a company that had great employees, but a lousy CEO?
When investors invest with you they will ask a LOT of questions. They will want to know who is managing it, and their track record. They will want to know who your law firm is, who your accounting firm is, and most importantly who you are. People don't part with their money indiscriminately. The stronger the whole package, the more likely you will earn their trust.
Nick K., you are thinking of the JOBS act. I'm not referring to the crowdfunding portion of the bill, but the part that will allow investment sponsors to advertise private offerings that are currently banned from making any public solicitation. Everyone latched onto the crowdfunding portion of the bill as being the holy grail for us real estate investors, but I don't think it'll have that much impact. The much more important provision of advertising will be much more impactful, in my opinion.
- United States · Member since 2013 · 26 posts · 0 votes13y
Brian Burke Thank you for your response. I appreciate your words of wisdom, and you have made things a lot more clear and understandable. It's always nice to learn something new and get more knowledge of something, especially when coming from a professional such as yourself. You've been very helpful. Thank you again.
- Stone Mountain, GA · Member since 2010 · 267 posts · 72 votes13y
Hello Deion -- Brian and others have explained and made it clear --here is my
thinking --There is plenty of money ( private ) available --and every one is looking for safe but high returns. It seems like --you have not owned a single commercial property or managed your self. When you do not have any money, you have to start small and work way up -- its easy to find partners, investors, once you have some track records.You want private investors to put up 20-30 % equity --meaning 100% financing. Then why some one do that. Investment Bankers even don't loan more than 90 % -- including mezzanine. Some lenders may go up to 100 % for
existing clients --where they have good report. And, if you are talking about a
large property --they also minimize risk buy joining forces --i.e. have three or four lenders make a loan as a consortium.They are NOT struggling. Plenty of investors out there and plenty of money is available.
You say --property has great financials and established --then why they are selling ? Why they sell to you and NOT others with cash. Also-why you can not convince Owner ( Seller ) to become a Partner or take a second mortgage for
30 % of equity. Of course --some lender will NOT allow that also.Large Property --big enough to attract investors -- Sorry --many private investors do not feel comfortable with large properties --they want to sleep at night. They diversify their investments in five or ten properties --and not in one. They may also invest in different type of properties.
Deal and numbers make sense to you --may be -- but Investors look at worst case scenario. That's why they want Owner to have his own cash in the deal.
I had two large hotels in Las Vegas and Michigan -- used to be worth $120 million and Broker was selling it for $35 million all cash. Another one in New York --was $400 million and sold for $160 million. Similar comparables happened in smaller scale also --in Hotels and Retail Centers --just take out few Zeros.. What happens then --Investors loose everything ?
What happens in a worst case scenario ? Tornados, Major Fire, Murder or drugs at property -- vandalism etc -- You need to have enough liquid cash --reserves for repalcement and vacancies --in addition to 30 % equity.
Yes-- Brian answered --about management --Realtor and Mortagge Broker mean nothing here --they have NO experience in marketing or managing the property. Even Corporate Lawyer does not have any experience --unless he owns some Commercial ( similar type ) property.
You did not mention --what type commercial and how big are you planning to buy ... Retail center, regional Mall, Hotels, Gas Station, Office Building, Warehouse, ??? what price --$5 million or $50 million ? What is NOI ?
Are you buying at 30 % below value --in today's market ? there are hard money lenders --who will do JV --equity sahring.
Back to your --question -- yes --it is possible, If you have a good busienss plan and how much you need. Regulation D --Private Placement Offering -- may limit to $2 million --check with attorney. Other way is Limited Partnership or Fractional Ownership--similar to time share --Need good attorney who knows --Securities and Fund Raising laws. Yes --you can buy a list of High Net Worth --people -- and send them letters or invite for a dinner at nice restaurant and do a Power Point presentation --if you have Confidence and be ready to answer questions --like Donald Trump.
I get so many emails --to invest --but I do not want to work 8 am - 5 pm job to manage properties --I work as Finder --
Best approach is to decide what type property --you want to owne --for long term -- buy a small and manage for few years --or work with a management company.
Once you get two --three years experience --then start aggressive buying.
Good Luck.
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