All Forum Posts by: Shane Melanson

@Michael Dusold - The way I fund my developments may be different than others.  So, it's not the only way to do it.

1st. I buy the land outright- with cash.  As I syndicate, this means, I raise the money from my investors and close on the land.

2nd. I De-risk my Deal

- I don't buy on spec. So, I've either got pre-sales (in the case of my industrial condos - where during due diligence and prior to  removing conditions, we pre-sold 70%).

- Or, I will pre-lease and find my anchor tenant(s).  So my downside is breakeven (provided I've done my homework on construction costs).

I generally have my drawings near completion to go in for a DP during DD.

I will have a very good # from my GC on the development at this time (we won't go to tender until we remove conditions and have an approved DP).

During this, I'm speaking with my bank.  How much debt can I get?  When?  

In a development- you're running many process simultaneous - so it's hard to say do this first and this second.

My main focus:

1. what is the demand for my site (and how much revenue can I generate).  I will adjust my site plan and renderings numerous times to accommodate the demand for the market

2. how long will it take?  Timing is critical (DP, BP, leasing, construction).

2(b). how much will it cost?  Does the deal make sense?  Can I achieve the rents or sales required to justify the development (I like 100% ROE, or 35%+ leveraged returns.  Development is risky, and if I don't have sufficient buffers and incentives, then the deal is too skinny)

3. What are the risks?  what can wipe me out?

4. How much debt will the bank give me and when?  What thresholds are required.  My bank wants about 65% pre-leasing or sales to advance funds.  

5. Once I have this, I raise my equity and then extra.  One of the biggest mistakes I've made in the past is raising too little money and then having to go back to investors for more.  This is something you'd rather not have to deal with.  The project paid out very well still- but, during construction, was stressful for me.

Does this give you enough to work from on securing your debt/equity?

You may want to have a commercial mortgage broker with experience in construction financing assist to.  They can help you through some of the steps above- what I've given you is the high level on how I look at and do my deals.

@Evan Brady - having come from the brokerage world, and not having done a deal with Cardone- I would say the main reason Grant is closing on the deals with his own money is for a few key reasons:

1. It's probably the only way he's able to compete with the big boys (think apartment owners who have 50K+ units and billions to deploy).  If the brokers asked "where is the money coming from" and he couldn't show proof of funds- he wouldn't be at the same table as the big boys.  Essentially, it's Deal Certainty. 

2. Time- he's likely putting up hard money on day 1 and then having to remove conditions in 18-21 days.  It would be very difficult to raise the equity required and do your due diligence up front in that time frame.

3. He has the money available- so use that now with the confidence that he will raise the funds at a later time without pressure.

4. Last- it's a marketing differentiator.  Grant is able to position himself against other syndicators by saying he believes in the deal so much he'll use his own funds to do the deal himself.  Most syndicators (myself included) don't have that liquidity or social presence (of millions) to close and then raise equity.

In my opinion and watching Grant for past 3 years- he's a smart businessman and excellent marketer.  He is doing what he can to sway investors to his deals- and he needs to be able to communicate why he's different.  I'd say what he's doing is working.  

The more money he raises- the more deal flow he sees (network effect of commercial real estate investing).

Saying all that- when you look at crowdfunding sites, like Crowdfund and Fundrise (2 I'm most familiar with)- there are some heavy hitters with deep track records doing deals on these platforms.

Most commercial investors/developers don't have the platform Grant has- so they are leveraging these crowdfunding sites to raise capital and from my observation, seem to be doing well.

For the record- I have not raised equity using the Crowdfunding route.  At this point, I'd prefer to grow my investor base from people I know and develop relationships with (which is a slower route- but fits my investing goals).

Hope that helps.

@Account Closed - if you don't own the land, one of the first things you need to verify (aside from zoning and what you're able to build) is the Geo and Enviro.

Zoning- what can you build?  (Density, setbacks etc) Sometimes I'll set a meeting with city officials to discuss.

Physical- Geo technical (soil) and Enviro- you will spend money here, but with this, architects and GC's are a waste of money.  An architect needs to understand the soil conditions before they can advise on the foundation.

Services - where are they?  Water/Storm/Electrical/ sanitary?

Legal- what is your access?  

Are there easements that will impact your footprint?  

Development is complicated- not to scare you, but to make sure you have someone with experience that can help you avoid the mistakes even seasoned developers make.

@Michael Ealy - finding a good (in your case great) property is really where every deal starts.  Great breakdown.  

@Jilliene H. and @Karen Margrave - I see this is an old post, but is a question I get frequently. How to start investing in larger commercial properties? Differences between JV's and GP/LP structures.

Some great answers above - from Jared and Brian above.  I'm not going to go into the technical ways to structure syndications, as they change over time.  Here's I'll focus on the principles that I feel are most important when raising capital

Here are my definitions/difference between Syndications and JV's:

Syndications: you are pooling money from multiple (accredited investors) to acquire 1 property (generally larger deals).  Multiply properties, can be called Funds (more complicated and in my experience harder when starting out).

Joint Ventures: is where 2 or more people come together to partner on a property. The JV doesn't have to be 50/50. You could JV with someone and still raise money in a syndication.

Here's my perspective on raising capital for commercial properties. This is based only on my experience and having been in the game of CRE for 10 years. I've seen many structures, syndicators who are excellent and some who were crooks.

There are 2 main jobs of a syndicator: raising capital and finding opportunities. 

The main challenge is- where do you start? 

If you have no money- how do you do a deal?

If you have no deal- how do you raise money?

It is a tough position to be in.  But, there are ways to manage it.  

1. Align yourself (JV if you will) with a successful syndicator who is looking for deal flow. Understand you will be finding deals and doing much of the sweat equity for a small piece of the pie.

2. Find off market deals- and control them.  I.E - get them under contract.

3. Understanding the rules of the CRE game is key. If you understand the players and how everyone fits together (great book on this is The Real Estate Game, by William Poorvu) - you'll negotiate from a strong position of power.

The technical ways you raise money has been discussed above.  

My focus is always on HNW people who I have a relationship with, or at worst, I'm 1 connection away. 

One of the biggest mistakes I see new syndicators make is allowing anyone with money into their deal. Investing in CRE is not always a straight line. And, with an impatient partner, who doesn't have the proper expectations, this can lead to you, the GP/Syndicator having to hand hold your LPs.

The value I bring to my investors is finding the right property, closing on it (raising the money) and then fixing the property (leasing it up, managing it for profit).  If I spend my time with LP's, then it takes away from that focus.

Side note- I do provide my LP's monthly or quarterly reports.  So it is critical to communicate with them and often.

Here are a few things I feel are worth keeping in mind when syndicating properties:

•  Investing starts once you find an opportunity. 

• It's not until you get to the next level of investing, where you understand how to raise money properly, that you can start taking advantage of the investing network effect- money attracts deals. Just follow the money, and you will see the best deals.

• Brokers and sellers follow the money- which is why you want to know how to raise capital.

Once you’re on an upward trajectory of finding better deals, it makes it easier to raise money. You can see there’s a network effect- the more money you have/raise, the more opportunities you see and the better these opportunities are. As you become the ‘go-to’ buyer in a market, investors with money, come to you and want to be part of your deals. So, raising money becomes easier.

This is where you see professional investors, who have been at it for years and who have developed a reputation for raising money, closing and delivering returns to their investors are able to make millions each year investing in commercial real estate.

Finding the property is where I start. 

But, I understand how to raise capital.  And, I'm always talking to prospective investors.  So, it's a good thing if you can do this in tandem.  Just know, HNW lose interest in syndicators that talk and never have real deals. 

You’ll end up with a reputation as someone who puts properties under contract, but never closes. 

Success in this business comes down to your ability to raise money effectively and find great properties to close on.

Hope that helps

@Gavin Rogers - there are some great answers above.  

The very short answer to your question is- everything is a negotiation in a commercial lease. You could, if you wanted, provide free rent in lieu of a TI allowance. This could be done a Gross basis or NNN - once again, however you can negotiate.

So, no, you don't have a pay any TI's.  There are some landlords that refuse to put money into their properties and prefer to have the tenant do all the work.  In those situations, generally lower rents and sometimes less qualified tenants.

The tenant, if they've been at it a while, may sense that you have not owned commercial real estate before and is pushing hard for a better deal.  That's not uncommon.

Just keep in mind- if you have a desirable property in the good location- he needs you just as much as you need him.

Now, let's say you both want to do business- what next?

In comments above the conversation around credit worthiness came up. This is a big deal in CRE. Same rules apply to leasing your commercial property as if you were renting out your house.

- can they pay?

- how strong are their financials?

- do they have references?

For ex- I'm leasing up a retail property I'm developing now.  I have a National tenant with a very strong balance sheet.  They are providing Corporate Guarantees.  I take this to my bank and they see the tenant and what I need to provide for TI's (because it's a new build- we are at $15 psf).  For some of our other tenants, we may be $20-25 psf.

But, the lease rate will be influenced in part by my TI's, tenant covenant, length of lease etc.

Hope that helps.

@Joel Owens - I will check them out.  I think Sandy did a deal close by a property I sold a little while back.  thank you for the recommendation  

@Ronald Rohde - it's approx 120k sq.ft with 25k to lease up.  thank you

@Eric D.- I'll give you a few things to consider for your first syndication.

Much of this will depend on who you're approaching.  A sophisticated investor (HNW) who's invested in syndications before will expect certain upfront fees (1-3% is fine- I look at the deal size, the risk and amount of time it takes to find the property.  Then, I apply a round # to it.  So for a 2.5M deal, you could reasonably charge $50-100k)

If you're putting up 30% of the equity that is a big vote of confidence on your part.  Your investors will like that.

You're split of 80/20 in my opinion is a bit too rich for the investor.  I've done this in the past- where on my 1st deal, I gave way too much up.  It makes for raising capital much easier- but, when the deal succeeds and you realize how much work went into it (finding it, financing it, fixing it, etc) - you may look back and say, wow, that was a really good deal for the investors.

8% pref is fine.  will the deal cash flow on day 1 to pay that?  

Management fee of 1-2% of gross rents is also fine

You may want to consider (only if you feel it's right) - a disposition fee and/or mortgage placement fee.  These are not required and frankly, I don't do them on every deal, but they are common.  

It sounds like you're coming at it with the right mindset- you and your investors are in alignment

With experience and a track record, you'll likely find a split with your investors that is more equitable.  If this is your first syndication- I think what you have is fair.

If you'd like, I wrote a short book on exactly this topic (Club Syndication).  Happy to link or send you a pdf copy (not sure of the rules in this forum).  Not pitching anything, just shares my exp raising money for past 10 years.

Right now I'm working on a larger retail property in North Houston.  As I don't have it under contract, I can't give too many details out in this forum.  

What I'm hoping to find is someone with local expertise in either leasing/developing or investment sales in retail properties in Houston.  Most of my contacts are in the apartment business- so I'm looking to find someone who can advise on this location and any local intel that would be helpful.

If you do, please post here and let me know if you'd be open to a quick call (to take offline). 

thanks