When it comes to large-scale real estate development, there’s hardly alternative to the famed OPM (Other People’s Money) getting in the mix of the development formula. Even individuals and companies with deep pockets will rather consider using OPM than dipping deep into their pockets to finance a development project, or even a purchase and flip transaction. Why is this?
That’s the key incentivizing and aversion commodity that makes all economic, even personal and social, decision a careful weighing game. Who bears the and effects or losses resulting from the failure of the project? Me, only? Nah! Even though the project is 100% mine, the sense to share the risks of project failure will allure me to engaging others with money who are willing to share in the RISKS and returns of the project.
When conceiving your project, right from the idea stage, careful considerations need to be paid to how to distribute the risks that may be associated with the yet-to-be-proposed project. If you are and individual or a group of individuals in an organization, you need to assume a frame of mind that will assist in the resolution of the challenge of risks distribution.
First: do you have the requisite personality, integrity, and attitudes to harmoniously, yet firmly insist on project contract and timeline, etc.? If you are the eccentric, volatile, domineering, fearful, non-confrontational, spiteful, etc. type, it will be best for you to work your project as a 100% Self-finance type. If you or anyone contracted with you were to attempt to carry the project through, disasters await.
Second: do you have the discipline to manage money? Would it be the best time for you to buy the latest car, or suddenly realize you’re living in a rented apartment, or you need to fund or finance something else other than the project for which you have raised investment for? If it is, stay on the 100% Self-finance path.
The third point you want to check out is: do you lack the staying power to see a longish project through to completion, notwithstanding project challenges?
If you answer in the positive to any or a multiple or all of the above teaser questions, good luck being a one-person real estate entrepreneur.
Should you see yourself in the reverse modes of the above questions, there are several options available to you to source finance for your real estate projects.
I must here assume that you have all the corporate, financial, accounting, and related structure and capacity within your company. If you don’t the likelihood is that you’ll have to hire more professionals on the project to cater for these project-essential management functions, an exercise which can eat deep into your project fund.
Now, let’s take a snappish look at your project idea. What is it? Where is it? For Whom is it? How is it going to be CAEPACD (Conception, Architectural, Engineering, Approval, Procurement, Construction, Delivery)? How is it going to be HMS (Hyped, Marketed, Sold)? If these are defined to clarity, then, we can ask the next set of questions.
Do you have the land; title to, possession of, and made ready for development?
Is the land in a viable, accessible, habitable area?
Have you developed your project concept, initial architecture design, and finance sourcing document?
Okay. Let’s survey the project financing options that may be suitable for you and your project.
A real estate project promoter has the following financing options with which to finance their projects.
- Private Placement and Similar Structure Real Estate Financing
- Joint Venture Real Estate Financing
- Equity Financing Real Estate Financing
- Debt Financing Real Estate Financing
- Syndicated Debt Real Estate Financing
- Direct Debt Crowdfunding Real Estate Financing
- Vendors, Contractors, and Sub-Contractors Credit
- A Financial Engineering and Model Comparing of Associated Options
We will be, in our subsequent blogs, dissect the options above and others.
Now that you’ll have define the option which you considered suitable for you and your project, you’ll need to consider the following factors in an effort to prepare yourself for the rigors of the process of whichever option you selected.
Is your credibility worthy of being financed?
People buy and invest in people, and not a product or service or real estate. And, what do people buy in people? Integrity, credibility, honest communication, competence, and more. It is a fact that everyone has credibility (to themselves). Do others consider that you are a credible person? I believe that a vast majority of us will answer “YES!” to that question. The point here is that you must be able to show that you, your company, and project are credible. Your credibility will show itself while in the process of engaging with prospective financiers. Do you keep to time, and promises made? Do others find that when you say “Yes”, it doesn’t mean “Maybe”? When you say, “Oh, the document is right on my cloud drive, I’ll send it in a minute.” that you actually sent it as would be expected? Well, I leave the rest to your judgment.
Pitching your project
Much at the point of conception, and definitely before engaging with financiers, start the process of pitching your project. Get a great website together; get social media campaign started; blog your project into the depth of the Internet of your target audience; get to the television and radio, and speak about this amazing project; appear ready to deliver the project. Why is this? It’s all a lie, a fraud, a deception, right? No! Not if you meant to deliver the promises you’re making. The thing we need to understand is that there is so much noise out there, and if you don’t make some quality, loud, aesthetic, beneficial noises, your project will not be taken seriously.
Vendors, Contractors, and Subcontractors
Get down to having a list and profiles of, and possibly pre-project contracts with key vendors, contractors and subcontractors that might work on the project. Get to the numbers with them; have proforma invoices signed and delivered to you. Why? Are you ready to start your project? If your answer if Yes, then, why wait to have the key elements of the project in hand? In additional case, the project financiers or partners would like to see such documentation that shows preparation.
Let’s face this ugly elephant! The killer of rapid and quality real estate development in Africa, and most especially Nigeria, is the tiny projects we planned, and seek finance for. There is money in the world. Only this money looks for projects with long-term, mitigated risks, large returns, with highly competent project promoter. We have everything, except the small project ideas. However, your project is yours. Finance will be sourced even for a one million Naira project.
Project delivery timeline
When exactly will the project obtain approval; start construction; start collecting off-takers’ funding; etc.? When are you going to deliver the project? When are you going to wound down the joint venture partnership or vehicle? When are you going to deliver the ROI to project investor? When will the project security or collateral return to you? These need to be worked out clearly with reasonable realization.
There you have it!
Yes, there are lots more areas of interest that a project promoter would need to pay the handsome money of attention to.
That’ll be in our next blog.