HOW TO OVERCOME OBJECTIONS WHEN RAISING CAPITAL FOR A REAL ESTATE DEAL

HOW TO OVERCOME OBJECTIONS WHEN RAISING CAPITAL FOR A REAL ESTATE DEAL

Often than not, syndicators get perfect investment opportunities with all the financial factors, economic risks, and physical characteristics appropriately in check. But sometimes it takes a lot more to convince the passive investors to stake their money. The Private Placement Memorandum (PPM) might have been properly prepared and presented but somehow the investors remain unimpressed. They raise objections that threaten the feasibility of the investment happening. They question your investment strategies as they are not convinced by the proposal. At this point, what do you do?

It is important to note that objections are usually a search for assurance and reassurance. If an investor wants to place a huge amount of money just because of the words of a syndicator, the investor needs to be 100% sure that the syndicator is 100% correct. These objections are not just peculiar to real estate deals; it plagues every form of investment proposals. This places a responsibility on the syndicator to get all the facts and figures right and ready. Objections are best addressed immediately. So as the investors are expressing their doubts, you quench them by your confident facts. Sometimes the syndicator’s confidence is all the investors require.

Years of experience in syndicating shows that most of the objections raised by the investors are “universal”. The objections are the same, year in year out. They are usually questions to ensure the syndicator has got the facts right or not. This article addresses some of these kinds of objections and the answers that can satisfy the investors.

· WHAT IF I HAVE TO SELL MY SHARES: Sponsors usually have a goal of making good profits on every deal or investment that their money goes into. The profitability is often connected to the proposed holding period. The investors pay close attention to the amount of time that has to be elapsed before the proposed profit is gotten for refinancing or sales. Investors know how fluid proposals and the business world can be. They are aware that sometimes they might need profit during the holding period. This informs their objections about liquidity. Similarly, investors also raise objections to the sales of shares to other investors or third parties. These objections are directed to establish the investor’s advantage of liquidity at any point in time. These arrangements and objections are usually answered in the original document. Most multifamily properties are purchased as Limited Liability Corporation. The sponsor’s investment in the property takes the form of shares. The agreement of the corporation, signed by the investors would determine the investor’s ability to sell the shares. In light of this, the syndicator must be thorough in the knowledge of the initial agreement. In some cases, the sale of shares to new investors requires vetting and assessment by the sponsor. If the new investor meets the criteria of the sponsor then the shares can be sold. In some other kinds of agreement, the sale of shares is completely prohibited. Investors raise these objections to know the possibilities and if they can tolerate the risk. In some cases, the Securities and Exchange Commission regulates what happens. This regulation is only possible if the SEC considers the deal as security. A deal is considered a security if involves raising capital, if it expects a profit if it is a common enterprise and if the investor is 100% passive.

· WHAT IF MY MONEY IS LOST: This is a very real question that is often asked by investors. There are risks in every form of investment. Whether it’s the stock market, multifamily property investment or even lending investments. These risks can only be mitigated or minimized. The conservativeness of syndicators in going for multifamily properties with positive cash flow reduces the risk for the investors. This level of risk puts necessity on new passive investors to carry out due diligence before investing a nickel. The passive investors must determine their level of risk so that they take full responsibility for their loss when the investment crashes. The concern of passive investors who are worried about losing their money can be addressed by taking certain precautions. Passive investors should only go into deals with sponsors that have a good reputation and track record. These investors should also be careful about the kind of syndicators that they work with. Syndicators with extremely cheap fees should be avoided. To reduce the probability of money loss, investors should only get involved in preferred return investments. In such investments, they would be paid before other investors who are not preferred would be paid. This represents a form of investment security. Investors should be informed about the cumulativeness or compoundedness of their returns. This greatly affects their overall returns. It is also important for the syndicator to let the investors know that your money is also on the line. Inform them about the risks that you are also subject to. On the flip side, negative returns can sometimes be helpful too. This significance is in terms of taxation as it can offset losses from other sources of income. Due to the influential and unstable nature of investment returns, it is best to stick with investments with a moderate rate of returns.

· YOU ARE NOT VERY EXPERIENCED: A great concern for a lot of passive investors is the syndicator’s level of experience in multifamily property syndication. Since a lot of passive investors are new to the multifamily property investment, they want a syndicator who is very experienced to create a balance. For syndicators who are also new, they can affiliate with other investors who have more experience.

SUMMARY

As a result of the amount of money, passive investors stake in investments (especially multifamily properties), they would naturally raise objections to proposals. These objections are usually just a way to get reassurance from syndicators. A syndicator must have all the facts and figures ready to answer the diverse objections from passive investors. Some of the objections have been discussed in this article, as well as their preferred answers. During proposals, syndicators have the sole responsibility of increasing investor’s confidence in the investment.