More New York City developers are taking advantage of a program that offers green cards to foreign investors of development projects, according to the Wall Street Journal, as stateside financing remains constricted in the rocky economic climate. The federal program, known as EB-5, grants two-year green cards in exchange for a $500,000 or more investment in a real estate development. The strategy has gained traction among developers like Forest City Ratner, which has received $249 million from 498 investors taking advantage of the program at his Atlantic Yards development. Experts like Evan Zeppos, a spokesperson for developer Jackson Street Management, said that EB-5 is increasingly useful in the down market. “It’s an attractive alternative,” Zeppos said. “Any developer knows now that for financing, the faucet is still very tight.”

Should you pay upfront fees to secure financing for you real estate project? It is the 64 million dollar question. For developers it is hard to pay upfront not knowing if the broker will succeed in securing the financing. For the brokers it is often the only way that they can cover their overhead expenses.  With ten deals a day to review but only 1 out of 100 getting all the way to financing it is important to have a regular income stream to cover the cost of deal analysis. So when should a developer agree to pay up-front application fees?

Here are 7 things to watch out for with up front fees:

1. Is the fee a reasonable amount to allow the source to compete their due diligence or is it large enough that the broker can walk away satisfied even if the deal does not get funded?
2. Can the fees be staged over a series of milestones – upon application, following site inspection, upon delivery of the lender term sheet?
3. Following the signing of a NDA, will the broker disclose the name of the lender to allow the sponsor to do their own due-diligence before accepting the fee structure and loan proposal?
4. Will the lenders accept the current appraisals or are they requesting that everything be redone?
5. Has the broker got a solid track record that can be verified through references?
6. Has the broker successfully funded deals over the prior 6 months to your request?
7. Is there a clause that says that some of the fees are refundable if the term sheet is substantially different from the LOI?

If the answer to the above questions is yes then you may want to consider paying the fee if the lender has offered you a LOI that makes sense to your business model.

Good luck and good investing – The Equity Finder

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

Every once in a while mega deals come along that need financing. $250m+ deals can be bears to deal with but there are supposed financing sources out there that seem to gobble up these types of transactions.

We were working on two such financing’s…one dropped out of the running this morning. The other mega deal that remains in our marketplace is looking for $500 million to build out a theme park and resort.  We have sourced a number of lenders who expressed interest and the development team selected one that is offering 100% financing at 6-7% interest. It is early days – due diligence is still being carried out – but we will wait and see the outcome and will keep you posted on this blog.

Good investing – The Equity Finder

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

Many developers begin looking for investors by producing  a comprehensive package of materials detailing their  opportunity.  Such packages often include, but are not  limited to, site maps, renderings, current state photos,  finished design samples, hard and soft cost proformas,  resumes and the all important “expected cash flow  summary”.  However, the packages often neglect to include  a snapshot of the deal from the investor point of view.  At a  high level – how much investment is required, for how  long, at what rate of return and how will that investment  and return be repaid.

Investors are interested to know if a deal makes sense for their investment strategy and how a particular opportunity stacks up against other deals that they are currently reviewing.  If a deal is presented in a beautiful, large package that has to be read from cover to cover to determine its essence it can be a major turnoff to the busy investment professional and casual investor alike.  This level of detail is only required after a first level decision has been made. To remedy this habitual overload of less important information, we suggest a simple spreadsheet investor summary.

Begin with the name of the project and a very brief description of the deal (it may be that this is the only document that the investor will look at to determine their interest in your project).

After this initial description comes the project cost and the request for funds – “equity requirements”. The equity requirement is similar to the sources and uses component of a traditional debt term-sheet.  It shows the investor how much the sponsor is committing to the deal themselves and how much is being sought externally. A typical equity split involves investors providing 90% of the required equity with the sponsor adding the remaining 10% (a 90:10 split).

It is then important to show the investor what they will get in return for participating in your deal – “Expected Returns to Investor”.  Here you overview what you are going to pay (typically broken out per year) followed by an internal rate of return calculation. The IRR tells the investor what their annual return would be if they invested in your project for x number of years. Three to four years is a typical investment timeframe, but investors do love deals that have long term high returns as long as they are verifiable (It should be noted that the “I hope to hold this deal for my grandchildren” is not always the best response to the investor timeframe question!).

Once you have laid out the equity requirement and the associated returns over the timeframe, you next have to prove your model.  In the example template below we have presented a breakdown of the cashflows to the investor and the sponsor and the refinance assumptions that feed the model.  On the supporting worksheets in the financial package it is prudent to model every aspect of the deal so that when an investor sees a number in the summary sheet that is questionable, he/she can follow the links and understand where that number originates.

Pulling together an investment summary can be a relatively easy process especially if you have the proforma model outlining all the costs and revenues – it is really just highlighting the right information and presenting it in a clear and concise manner.  Without it however, your deal can die before it is even reviewed by the investor.

We hope this helps you to think like an investor and to more easily secure the equity you need for your projects.

Sample Template