Commercial Investment Real Estate May/June 2016 | Page 16

FINANCING
FOCUS
Competitive
Conundrum
d
by Zack Markwell
During the last fi ve years, real estate developers have benefi ted
from an aggressive lending market coupled with falling capitalization
rates. This has increased interest and competition in build-to-suit
and speculative development.
As cap rates continue to reach all-time
lows, developers are of en forced to front
their own capital as they price build-to-suit
projects. However, there are alternatives.
T ey can partner with an experienced capital
provider and successfully seek and execute
new development business without having
to risk more of their capital.
Complementary Partners
Partnering with a capital provider that has
solid experience in both debt and equity
real estate capital markets allows devel-
opers to pursue more deals and create fee
income. Strong capital f rms will also dem-
onstrate creativity when solving complex
f nancial problems.

May | June | 2016
Ideal capital partners will rely on the
developer’s expertise in development mat-
ters. Firms that try to be both developer
and f nancial partner can sometimes create
conf ict and tension with developers, which
is counterproductive to a project’s success.
T e best capital providers will under-
stand their development partners’ needs
and have the f exibility to structure a part-
nership that works well for all parties. T ose
who employ a one-size-f ts-all approach can
sometimes create a situation in which one
party is lef feeling short-changed.
T e partnership may be as simple as hav-
ing the developer work on a fee basis while
the capital provider brings the entire capital
stack, including debt and equity, as well as
providing any guarantees required by lend-
ers. T is structure allows the developer to
preserve capital and lock in their economics
while avoiding market risk. Others may be
willing to accept more risk in order to par-
ticipate in the upside potential of a project.
Sometimes this involves the contribution of
the land or a portion of the development fee
in exchange for an equity allocation.
Whatever the case, it is important to work
with a capital provider that understands
the developer’s needs and has the creativity
and experience to structure a partnership
that works for all involved. T is can lead to
follow-on deals that are more ef cient once
a mutually benef cial partnership structure
has been worked out.
Avoiding Pitfalls
Today, tenants and tenant reps are select-
ing developers and pairing them with all-
inclusive capital sources. By forming this type
of partnership on the front end, developers
Commercial Investment Real Estate
Net lease developers can thrive
with the right capital partners.