Raising Capital for Large, Commercial Real Estate Projects

Solid investments in commercial real estate represent one of the best methods for simple, steady cash flow. While the 2008 financial crises had large impacts on the commercial real estate landscape, it also created a great deal of opportunities for real estate acquisitions. Finding a good deal is always much easier in a down market. Unfortunately, capital constraints frequently hamper smaller investors from being able to invest in larger, commercial real estate deals.

Luckily, raising capital for commercial real estate projects, while never completely easy, has become more feasible in recent years with the expansion of new securities laws, including crowdfunding. By expanding the potential pool of interested investors, issuers are now able to source capital more quickly and more efficiently for both residential and commercial properties. In doing so, however, issuers also increase the amount of complexity in investment management pursuant to each transaction.

Equity vs. Debt

In a typical capital raise for commercial projects, an issuer will include an institutional lender for the debt source on the property. The loan-to-value ratio and overall value of the property will determine the amount needed to be raised as equity in a private offering. Today’s commercial projects have larger loan to value ratios than those that were available before the most recent financial crises. And, unless you know a number of high net worth individuals, accredited investors or private equity groups that can and are willing to fund the equity portion of your desired project, the likelihood of you funding without a general solicitation on the equity component to the deal would have been slim to none.

It is expected that even the debt investing in the crowdfunding market will become “a thing” before too long, especially as rates rise a bit and investors are looking for safer, asset-backed securities where they can clip a regular coupon. The eventual choice between a debt and equity investment in commercial real estate will be based on the amount of capital needed, the amount you have and your risk profile. As always, it is best to consult directly with a knowledgeable professional when making legal and investment decisions, but there are more options available to today’s main street investors than there have been in sometime.

More Options for Issuers

Issuers also now have more options in the depth and breadth of groups they are targeting for investment. This means that development projects in commercial real estate, including large multi-family complexes, mixed-use commercial, storage facilities, industrial complexes and retail units can all benefit from new, advanced methods for capital requisition in the financial markets.

While the offering capabilities have expanded, there is still regulation and investors have grown warry of “the next big thing.” In addition, the security issuers also open themselves up for greater management headaches. More investors require a bit more investor management prowess, even IF deals are structured as a General Partner with Limited Partner investors. Understanding the lay of the land when performing this types of capital raise is helpful and often requires a handful of investment, banking and legal expertise by your side.