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What kind of capital is available for real estate in general?
Most of the commonly used instruments in CRE space are:
- Senior Debt aka First Mortgage
- Sub Debt or Second Mortgage
- Participating debt i.e Mezzanine Financing
- Limited and Common Equity
How does the flow of private capital works?
Based on the size of a developer or the property owner, different types of capital sources are available in the marketplace:
- Large: Family wealth, Institutional capital, IIROC
- Medium: Family wealth or friends & family
- Small: Friends & Family
Why is it so difficult to raise capital for private projects?
The challenges are manifold:
- Lack of a proper and harmonized Regulatory framework
- Oligopolistic nature of capital formation industry in Canada
- Inefficiency in the traditional financial advisory channel
- Opaque nature of the industry in general
How can we measure cost of capital for real estate projects?
Cost of capital is measured by calculating the weighted average of Capital Stack i.e Senior Debt, Mezz Debt, Pref & Common Equity. The capital costs are subject to a variety of different factors which include sponsor experience and property level risk. In general suppliers of capital expect a level of return that is commensurate with project risk. It also is a function of the product i.e Debt or Equity.
What is the typical due diligence and underwriting process/criteria employed in the CRE industry?
Capital providers will conduct a deep dive into a variety of project related attributes. This includes research into and investigation of the following:
- Business/development plan (investment strategy)
- Risk/return profile
- Existing financial sources
- Proposed financial uses
- Exit strategy
- In depth market analysis including study of comparable properties
- Third-party reports
- Phase I and II Environmental
- Appraisal (Current and Stabilized)
- Engineering (Property Condition Report, Geotechnical Report)
- Budget analysis including detailed breakdown of construction costs
- Architectural plans and site plans
- Pro-forma financial analysis
- DSCR/LTV sensitivity
- Investment structure
- Legal/organizational structure
- Third party references
- Site visits
What kind of advise and consulting your provide on the capital structure?
Through our coporate finance and advisory platform, we are able to advise our clients on the right structure to optimize their capital stack in private capital markets. This include advise on structuring GP/LP docs, compliance related paperwork, return calculations and feedback on market expectations on risk/return and corresponding pref returns and promote structures that are commonplace in the industry.
How can I close on a capital raise?
We have affiliations in place with multiple entities in the marketplace to help you navigate the plethora of documentation and paperwork in an efficient manner. Once engaged, we will be able to guide you in the right direction.