Shopping Center Syndicates - Continued...

Shopping center syndicates - continued from previous page...

In today's world, developers are no longer just developers; their main business activity is promoting income-producing commercial real estate developments to the investing-public.  Their goal is to promote as many new projects as they can, as quickly as they can.  By providing the developer with a ready pool of equity financing for new construction projects, the investors are placing the developer in the position of being able to create "moral hazards".  A syndication plan must envision the different scenarios that may lead to the developer committing a moral hazard and create solutions to prevent them from happening once the syndicate's money is in play.

Second Syndicate Prerequisite - Prevent Moral Hazards & Create Opportunity

The due diligence process can be used as a means of "dialing in" the project so that the developer doesn't stray far afield of the program goals unless the developer wants to foot the bill for his/her actions.  Rainmaker's due diligence process envisions more than 70 due diligence documents that must be provided by the developer in order to qualify the project for syndicate financing.  These documents include the architectural design documents that must meet Rainmaker requirements, pre-construction phase contractor documents and services that serve to lock-in the cost of development and construction.  Finally, the operations must be undertaken pursuant to a plan that has been approved by the project property management firm.  The site plan must be approved and all required civil, structural, MEP and site engineering reports and designs must be complete enough to allow the contractor to issue a gross maximum upset price for construction (essentially, locking in the construction cost).  Rainmaker's policy is that the developer should be the least experienced member of the strategic project team that includes the various engineering disciplines, architecture, interior design, valuation, zoning, etc.

The other outflow of the second syndicate prerequisite is to further lock-in the potential returns the syndicate investors are seeking by eliminating a majority of the issues from impacting the transaction leaving only the market risk issue to be decided.

Talk to a Rainmaker consultant and get a complete explanation of all facets of syndicate sales programs for commercial income-producing property development programs.

Third Syndicate Prerequisite - Market Risk Only

The third prerequisite of closing on the financing is the elimination of virtually all other subjective investment risks possible, leaving the syndicate in the position of shouldering the market risk exposure in return for the lion's share of the near-term equity and profit distributions.

This leaves back where we started; are we talking about a condominium investment plan syndication, a fractional tenants-in-common real estate syndication or both?

The obvious answer is both types of syndicates are employed in today's project financing structure because these two (2) types of syndications provide at-risk equity financing based upon different considerations.  These two (2) syndications also have different projected holding periods.

The condominium investment plan is more limited than the tenants-in-common approach because consumer protection laws in most states prevent the developer from using the condominium sales proceeds until the project is finished or nearly finished.  Accordingly, the condominium syndicate is sized so that the net proceeds of the condominium sale plan (on sell-out) will be equal to the capital expense of the last month of the construction program.  The business deal is different because the condominium syndicate investors are, by and large, not part of the construction risk pool (their money only gets spent in the last month).  Accordingly, these syndicates typically have a projected term of seven (7) years and the developer will have a buy-back option that expires at the end of the seven (7) year period.

The fractional tenants-in-common syndication plan typically does not have the same restrictions placed on the sales proceeds as would be the case with the condo syndication plan.  This means the proceeds may, under certain circumstances, be applied as early as the pre-construction phase of the project's development program - making the tenants-in-common approach the natural choice for providing enough at-risk equity contributions to qualify the construction loan for consideration as a non-recourse construction loan that also waives the cross-collateralization requirement.

Fourth Syndicate Prerequisite - Two Is Better Than One

By using both the condominium plan and the tenants-in-common plan syndication approaches the developer can be induced to undertake the project and eliminate the investor's exposure to moral hazards and other loss of investment risks as these risks occur.  

Providing the necessary capital to make the program really work for the developer and the syndicate investors is what we do at Rainmaker.  Every tenants-in-common syndication plan has the following sales goal targets:

Want to learn more?  Get your own rainmaker perhaps?  Call us today and find out what the real targets should be for your investments.