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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.
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:
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The
first target is to provide enough at-risk capital contributions to
induce a lender to make a loan - regardless of the recourse or
cross-collateralization requirements; then
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The
second target is to provide enough at-risk capital contributions to
induce a lender into making the construction loan on a non-recourse
basis and waive the cross-collateralization requirements; then
-
The
third target is to continue to sell subscriptions and use the net
proceeds for debt reduction of the construction loan. As the
proceeds pile up the risk of total loss due to foreclosure or
bankruptcy is reduced until - on sell-out - it is entirely
eliminated from the transaction construct.
Want
to learn more? Get your own rainmaker perhaps? Call us today
and find out what the real targets should be for your investments.
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