Defining Equity Capital Opportunities that
Work for You

Jan David Reese

Published online 08-08-2005

For developers and real estate buyers, the task of matching project goals with compatible institutional equity partners is a bit like driving a golf ball toward an ever-moving target. It can be done, but you would certainly feel much more confident in your game if you had Tiger Woods along to help with strategy.

Selecting the right equity capital source to approach for a partnership can be the most challenging step in the overall process of securing appropriate financing for large-scale commercial/residential ventures. Navigating the research phase to identify an institutional equity partner who is aligned with your mission, values and business style and negotiating to arrive at an airtight agreement take practice, skill, and experience.

To avoid the pain of trial and error — where an error could be fatal to your project or company — it is crucial to understand the full field of potential institutional investors, and to fully assess their different motivations, objectives and the fundamental internal functions that characterize each group. In the world of institutional equity, for instance, the Wall Street investor/investment fund makes decisions according to a very different set of criteria compared to the typical foundation or pension fund. Similarly, each type of investor operates at a different pace, with some more receptive to the rapid swing of multiple new investment prospects.

To compound the complexity involved in finding the right investor, the criteria for successful partnerships are constantly changing. For example, foreign investment sources, motivated by tax-related issues, were once almost exclusively interested in the acquisition of low-risk, Class A properties with a commitment for the long-term. Today, these same investors are gradually changing their investment strategies, seeking greater return and accepting higher risks in acquisition and development.

While the institutional investment rules are always changing, some basic tenets that hold true today can help frame a general strategy for locating the right partner:

• Long-term, lower risk properties and development projects: Today, acquirers and developers targeting lower-risk projects, including well-located office buildings, industrial facilities with credit-worthy tenants, or retail shopping centers with a major anchor tenants, are more suited to the goals and operational style of a pension fund, foundation or family investor/family office investors. It is important to note that among these three investment categories, each has a unique goal and style of doing business.
       A family office investor, for instance, is seeking a well-diversified portfolio, and may consider short-term risks, but is more likely to invest in limited number of more conservative and long-term projects. Relieved of a large hierarchy of decision-makers, the family office investor may be able to make a decision more quickly, but may be less motivated to close a deal quickly. The family investor may also be interested in smaller investment transactions.
       Pension funds, on the other hand, are more consistently conservative, slower to act, but often have a greater number of real estate investment targets in sight.

• Short-term, higher risk properties and development projects: For projects with quicker turnaround and higher risk, Wall Street investment sources remain a likely target for partnership. From self-storage to cold-storage facilities, and hotels to non-traditional anchored retail centers, Wall Street firms tend to target higher-opportunity projects. Foreign investors are also now targeting higher-risk projects.

Ultimately, when considering options for engineering the financial structure for large-scale commercial/residential ventures, equity capital financing is always at the top of the list, but for many developers and acquirers it can be an elusive, time-consuming and ultimately frustrating pursuit. For developers caught in the cycle of selling individual projects to individual investors, and relying heavily on commercial real estate loans and debt financing, the shift to creating and marketing a strong proposal to the right institutional audience represents a change in both the new approach and potential outcome.

Of the many challenges that developers and acquirers face, targeting, connecting with and convincing the right institutional partner at the right time is among the greatest. Understanding the different equity sources — including Wall Street investors, foundations, high net-worth individuals, pension funds, foreign sources and family office investors — is a vital first step.

Knowing when the rules are about to change, how to package a project to match with the shifting goals of an investor, and how to target an investor who will be there with you for multiple deals – this is the realm where the guidance of an experienced advisor can truly make or break the game.

— Jan David Reese is the Executive Vice President for Cypress Creek Capital, a strategic real estate advisement and investment firm anda wholly owned subsidiary of BFC Financial.