Commercial Real Estate: Raising Equity

Those researching the subject of commercial real estate investment are likely to encounter the term “OPM” on a regular basis. OPM is an acronym for “Other People’s Money.” I’ve covered this topic in general in an earlier article, but today I want to focus on raising “equity” for your commercial purchase transactions.

To review, the reason many people are reluctant to invest in commercial real estate is that the property values are often so high that it takes a great deal of money to complete a transaction, even using75% to 80% loan to value commercial loan. Few individuals have the financial resources needed to buy suitable properties for cash, let alone the $1,000,000 or so you would need to purchase even a moderately priced $4,000,000 building. This is where the concept of using other people’s money comes into play. The idea is to pool the funds of like-minded investors to purchase a property and then duplicate the process to build a portfolio.

The difficulties facing most investors are finding the other people with the money and proactively structuring the transaction. Everyone needs to be clear on their role in the transaction, how profits (or losses) are distributed, how results are reported, and how the project ends successfully. The process is not as difficult as it may seem at first and it even has a name: “Syndication.” Potentially, even commercial real estate syndicators with little or no credit history have access to hundreds of thousands of dollars, all as close as the people they already know. One word of advice here, though: Start making a serious effort to clean up your credit if you are challenged in this manner. You may have to guarantee some loans and you don’t want your credit history to be a stumbling block.

Before you start telling everyone you know that you are raising money for a commercial real estate investment, there are some things you need to know and that you’ll likely have to research:

First, you need to understand investment entities, such as Limited Liability Companies. You need to know how they are formed, operated, taxed, and unwound because they will be your primary investment vehicle. They also establish who is responsible for what actions through the life of the investment.

Second, you need to learn about and understand a document called a “Private Placement Memorandum.” It has other names like “Investment Circular,” “Investment Disclosure,” etc. This is the document that discloses all of the potential risks inherent in your proposed investment. You need to be extremely thorough in discussing those risks because should something go wrong with the investment and you don’t cover it here, you could be subject to a lawsuit. One key aspect of this part of the process is having a good attorney working for you with experience in these types of transactions.

Third, you need to have good analysis and presentation skills. You should know the ins and outs of spreadsheets (or know someone who does) so that you can dissect a transaction completely and put together a good case for making the investment to your potential investor partners.

Fourth, you need to find the investors. Start with busy, successful people whom you know, who have more money than time: Your doctor, dentist, psychologist, veterinarian, accountant (who is really good for knowing OTHER busy, successful people with more money than time), attorney, dry cleaner, golf pro, etc. You’d also be surprised how many people you know who have I.R.A.’s or 401k plans full of under-performing money who are looking for a good investment vehicle. You can advertise for investors, but be VERY careful before doing this. You MUST talk to your attorney about local securities laws and how they affect what you say and to whom you say it. You want calls from investors, not regulatory agencies!

The process of raising commercial real estate investment equity isn’t rocket science, but it does involve some study and the help of some knowledgeable professionals. Take your time to do it right and you’ll be making more money (your own, this time) than you thought possible.

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