So how do we navigate the forest of sourcing and structuring our big project pipeline? After putting in a tremendous amount of serious time and effort into our capital markets activities and over time establishing many well-conceived working capital partner relationships, we have learned a few things that are worth highlighting. For a start, some of my bigger picture advice on the subject is as follows:
First, I would say capital markets rule number one is to establish multiple capital partner alternatives; not placing all your eggs in one capital partner or lender basket as even the best capital sources can run hot and cold over any given period. You don’t want the lack of project finance to stall your hard-earned development momentum. Tenants want the property turnover to occur on time and if you can’t demonstrate that on an ongoing basis, they will find another preferred developer who will.
Second, don’t look past the people factor. Overall, capital group culture matters a lot. Select capital partners that have integrity and are responsive. You want partners that are deal doers & problem solvers and are not loan-to-own or pull the plug fast types. You want to build long term relationships, not lenders that have a one and done mentality or lack capital ability. You want a lender that is experienced enough to know the relative importance of magnitude on material deal points or development items that are significant; especially relative to critical dates that tie into your project timing. A financial partner that’s able to make common sense decisions and find common ground solutions is paramount. Have you qualified them to ensure they have deep enough capital to not get unduly worried over a project going a bit slow and in the positive when you get rolling can and will ramp up with you to quickly do a series of projects. Hopefully you are lucky enough to pick the right financial partner, one that you enjoy working with you may very well end up spending a lot of time with them. It is good to keep in mind that “you get what you pay for”, even if there is a marginally higher cost of capital that comes with the higher quality capital partner. More times than not, it may turn out that you made a wise choice by taking the high road.
Third, have a deep heart to heart with yourself and your development partners about your financial risk tolerance; especially about signing personal guarantees and how much personal capital you are comfortable putting at risk. You most likely have most, if not all, of your business life tied up in your developments which means a big chunk of your hard-earned savings. In finance there is the maxim that “concentrations can kill”. Don’t put all your finances in one place. That’s like going to Vegas with all your money and betting it all on one number in roulette. Vegas odds are a fast way to go broke. Better to not stretch your personal risk taking to the extreme. Best to stay well away from even remotely possible sudden death scenarios.
Fourth, someone on the development team needs to invest a lot of time into the capital formation pursuit, capital partner and lender relationship management, and develop a sharp understanding of project financing alternatives, deal structuring, and related legal documents and ongoing pro forma analysis. To speed up the learning curve and to avoid mistakes, it is advisable to find a capital markets expert you can pull in when added expertise is needed. Veteran developers come to know what things they can handle themselves and when they should call in outside expert consultant. Best to heed Proverbs 15:22 “Without counsel, plans go awry, but in the multitude of counselors they are established”. Many times, as part of our capital review and decision-making process, after huddling with ADS Senior VP of Finance Phil Kwiecinski, we have pulled in our outside financing expert, Eli Castronova with Velocity Retail Group who has over 30 years of finance industry experience. Sometimes his added expertise helps to validate that we are already on the right track and provides further expertise with more nuanced financing items. Often his input has made a significant impact on our project financing direction. Overall, it is not prudent to jump over a dollar to save a nickel by trying to do finance all by yourself. It is far wiser having your capital markets sharp-shooter available on speed dial. Timely input can be invaluable in your making optimal capital market decisions.
Structuring optimal project financing solutions requires combing through lots of details involved with a sharp analytical eye. While the effort to get one or two quality projects financed may not be a real high hurdle, once you get to where we are at Accelerated Developments Services, with a big pipeline of projects in over a dozen states the financing surf gets big. It is North Shore Hawaii winter swell level like stuff, and it can be dangerous to take off on one big wave after another unless you are well prepared and in peak shape to make it an exciting ride.