What is required to attract project funding?
1. COMPLETE MANAGEMENT TEAM – The number one reason that projects do not get funded is because they lack complete management teams with appropriate project experience. They may have a few key players, but as a team they fall short of the project’s requirements. Or they may have a great management team that lacks project specific experience. Project developers need to have an experienced team assembled before they look for equity or debt funding. Management depth is a plus, but the real focus should be on the top three executives; CEO, CFO and COO (and CIO in some cases). If developers do not have a complete management team, they should consider a strategic joint venture with another firm that augments their management and experience. The days of “we will hire the right guy later” are over for the immediate future.
2. SIMPLE BUSINESS MODEL – Great ideas attract interest. Great business models attract capital. An experienced management team understands how to structure a strong business model. However, they must also be careful not to make the model too complex. Focus the business model on the things your management team does best. If you are a hospitality developer with extensive experience in rezoning, entitlements, and project design consider selling your shovel-ready projects to other firms with extensive construction and operational experience. The simpler the model, the higher the odds of getting funded. Many business models, while well thought out, are just too complicated. Simplify if possible. Shorten the investment term. Simplify complex revenue streams. Mitigate risk whenever feasible. What yield you lose in risk mitigation, simpler revenue streams and shortened investment terms, you will make up in lower cost of capital and lower yield requirements for that capital. Simpler is better, because there is less that can go wrong.
3. MARKETABLE INVESTMENT STRUCTURE – Things have changed and developers need to readjust their investment structures to attract capital. Underwriting is overly conservative and capital, especially equity, is at a premium for the foreseeable future. Investment structures must be designed to compete in today’s capital constrained financial markets. While preferred returns are still in the 8-12% range, risky investments can require IRR’s in excess of 30%. Management fees are between .5% and 2%. The developer’s equity requirement is higher, ranging between 5% and 20% of equity and is treated pari-passu. Promotes are between zero and 20%. Many capital sources want to buy-out developers once a project is completed or at pre-negotiated CAP rates once stabilized. Most projects will not survive this type of heavy investment restructuring because they cannot produce enough yield to satisfy underwriters let alone fairly compensate developers for their efforts. Those projects that survive this ‘compensation crunch’ will usually find interest from multiple capital sources.
4. CLEAR & CONCISE PRESENTATIONS – Rarely are investors the first to put an offer on the table. It is only after detailed investment analysis and committee approval that they will put forward a term sheet. In addition to the project investment lead, a number of analysts and c-level executives must understand all aspects of the project. More often than not, their main method of determining a project’s worthiness is through review of the developer’s presentations. It is up to the project developer and their advisors to put together the structure of the deal and present it in a clear and concise manner. While investment bankers and investment advisors tout their large databases of potential investors, their real value is in helping project developers define their investment structure and hone their project presentations. A well thought out project presentation with a clear investment structure is ten more times likely to get funding than one that is not. Investors will not put their capital at risk on a project that they do not understand no matter how impressive the returns. Investors can be impressed by charts, detailed spreadsheets and eye-catching photos or renderings, however it is the articulated argument that gets them to pull the trigger.
If much of the above sounds familiar, it is. In the years preceding the global financial crash, project developers and capital sources strayed from the basics. Underwriting was loose and capital placement was easy. Not anymore. The bar has been raised once again. It is time to return to well thought out project development and presentations. That is the great thing about a capitalistic system, it will always find its way back to common sense.