Capital Market trends are a barometer for where the commercial real estate market is headed.
Bryan Shaffer is the Principal Managing Director at George Smith Partners. GSP is a boutique capital market resource providing owners & developers the structure capital needed to complete projects nationwide since 1979.
The value of utilizing a broker like George Smith Partners is that they are in the market every day, and know when it is more beneficial to utilize one option over the other. This compares with a bank who has one model. The capital market is continuously changing. They work for the client in hope to create a relationship that continues to help the borrower get the money needed to grow their business.
Large commercial real estate projects come with tremendous risk. The borrower sees opportunity, while the lender sees the risk. If the lender does not feel comfortable with the borrower or the project, they will not finance the deal. An experienced finance professional has the needed relations with the various lending products. They can help the borrower explain their project to a prospective lender that will assure the lender of the projects upside, and set them at ease with the potential downside.
Most new investors use their own capital and raise additional funds from family and friends. A proven track record with successful, profitable projects will attract investors with capital who are looking for lower risk.
Mistakes Borrowers Make
The most common mistake borrowers make is to not focus on one particular market. If you are constantly chasing the next hot market, you will never develop the intimate local knowledge that puts makes investors confident you know the market.
GSP is best suited to help the owner or developer who is focused on finding deals and needs help raising capital. In these situations, they can partner with the project owner to locate the capital needed to finance the project. This allows the developer time to find more deals.
An ideal partner for GSP is someone who has done multiple smaller deals in a specific market and has intimate knowledge of the market. They have the market knowledge, but need help with raising capital. This is the perfect opportunity to work with GSP.
Commercial real estate is all about relationships. For owners looking to grow their portfolio and needing help to solve the capital requirements, GSP can be the solution. Their extensive network of capital sources include traditional sources such as commercial banks and insurance companies. Additionally, they have multiple new capital disruptors such as crowdsource funding and private equity funds like BlackRock and Blackstone, which are not available to all mortgage lenders.
A perfect borrower is one focused on growing their portfolio, like the client they helped grow from two apartment properties to over thirty properties. GSP was able to help bridge the gap from $10 million properties to $50 million properties.
The capital stack needed for a deal is made up of debt and equity. For both single operators and syndicators, the traditional sources of equity come from the individual developer, friends and family while debt has come from banks and institutional lenders.
The recent disruption of the financial market has made crowdsource financing a viable source of capital. Additional private equity funds like BlackRock and Blackstone are resources available to GSP, which may not be available to all mortgage lenders.
The market is client specific. If you are a proven developer in one market, that does not guarantee success in a different, new market for you. Lenders look for the borrower who has knowledge of the market based on their experience in the market.
A mistake many developers make is trying to follow the hot market. Jumping from hot market to hot market is not the path to proven success. Lenders want to know that you know what you are doing, and that you have success in the market.
Lenders like larger markets that provide insulation from failure based on the large number of potential opportunities to guarantee your success.
Lenders want to know that the deal sponsor has experience and success in the market your project is located in. The lender wants to make a safe bet that you will be successful. This is different than the borrowers perspective. The borrower wants big returns, the lender wants small safe returns.
Each asset class has its unique risk. Lenders like to lend to a low risk opportunity where they know they their investment is protected and will get paid back. The following are some examples of assets and situations where George Smith Partners were able to provide financing solutions to their clients.
Hotels are considered one of the more risky asset classes. They are susceptible to the winds of the economy. If there is a terrorist event, economic downturn or similar event, people will not travel as much nor rent hotel rooms.
To make a hotel less risky, GSP was able to do some additional research and apply their experience in the market to recognize the upward trend and make the case to a lender and get they borrower their loan.
Multifamily on the other hand, has more predictable demand and is less susceptible to down turns. People need a place to live. When the economy slows down, people lose their homes and need a place to live, so they rent. As long as you operate and keep the property full, the lenders will get paid, and they like that.
Office A recent office project where GSP was familiar with the marketplace gave the developer the help needed to complete the project. Because GSP recognized the positive trend developing that other lenders had neglected to see, they were able to get the financing for the borrower to needed to complete the project.
Most borrowers are excited to get a low rate for their loan. However, too often, borrowers fail to think through their plan for the asset they are financing. Is there a yield maintenance penalty that prohibits the borrower from selling or refinancing early? Failure to recognize this can on the front end can ruin your otherwise profitable deal.
The Real Estate market cycle goes up and down. For the past 10 years the cycle has been on the increase, compressing CAP rates, and driving prices higher. As the cycle continues, markets that have been hot are cooling as investors refuse to push prices higher, and instead they look to secondary markets for higher returns.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: To me, I mean, you know, we are in the risk reward business. I mean, people get loans based on the level of risk. If it was a very risky loan, you pay twelve percent. If it's not such a risky loan, you pay three or four percent. So we're always looking at risk.
But if I look at a more global risk to my business and really to the market as a whole, I think you've got to think about the economy and what causes a real estate downturn and what influences a market to go from being a very hot market to a very cold market. And really its activity. So when activity dries out, when people stop buying properties, people stop selling properties and people have fear when people are thin or they don't move.
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