New Apartment Construction Financing - Risk Management

There are certain kinds of investment risks that are inherent to every project.  These risks cannot be eliminated forever, just for the period of time while the project developer/sponsor and the syndicate agree upon certain business matters.  This agreement creates the conditions required to eliminate the risk.  The most common risks the syndication platform may eliminate include the following:

• Construction Risk (Classic Definition):  the risk that construction activities are not managed for the benefit of the lender and the equity investors resulting in cost overruns due to delays, underestimation of the costs of construction or what amounts to the same thing.  The syndication platform's due diligence program includes the requirement that all construction programs be undertaken on a design/build basis thus limiting construction risk matters to those matters that may be caused by inclement weather.

• Construction Risk (Market Definition): the risk that construction activities will not be managed for the benefit of the lender and the equity investors resulting in a significant loss of capital due to pre-leasing losses when the proposed project is not completed on time and customers walk away to competitors.  In rental housing and senior housing communities this is a significant risk issue and the qualifying reasoning behind requiring every investment to be a higher-yielding opportunity in order to reward this risk-taking.

• Third-Party Claim Risk: the risk that a third-party will make a claim against the business resulting in a loss of value to the investors and the lender.  This risk cannot be eliminated and exists, more or less, in proportion to sales activities.

• Bankruptcy & Foreclosure Risk: the risk the project will not generate sufficient revenues to pay creditors, thus resulting in a suit of foreclosure and/or a bankruptcy petition being filed.  If a sell-out occurs, then the project will be capitalized with all equity contributions.  All long-term liabilities (and most short-term liabilities) will be eliminated.  As long as the financing remains in place, these assets will be devoid of bankruptcy risk and foreclosure risk.

Are you now seeing the superiority of this approach over what you were taught way back in B-school?  Leverage is nice when everything is already in place and little change is expected.  Unfortunately, that is rarely the case in commercial real estate development financing.  Now there is a way to put an end to these "deal-killer" risks.

Contact Rainmaker Marketing Corporation and learn what we can do for you and your project development ambitions.  It's never too late to learn a new way of doing things - profitably.