How to create capital for development, while preventing profit losses

If your actions inspire others to dream more, learn more, do more and become more, you are a leader – John Quincy Adams

Large developers that can create a great deal of “product” for long-term investors are incredibly attractive. Development is primarily local, and large national organizations require working with local companies to build their portfolios.  The entrepreneurial nature of developers is that they generally want to be smaller organizations. Developers want to take as much risk as they can mainly using “OPM other-peoples-money,” and taking project-level capital creates that opportunity.

As the projects move toward NTP, the check sizes become larger and larger. Then you hope to be able to find the right long-term owner, as opposed to having that intermediate step along the way where it goes from a local developer. The originator created the opportunity, who sells it to the more significant developer who takes their cut.  Ultimately the project is sold to the right long-term owner. If the developer can skip that middle step, there’s more money in the deal for them.

Profitability, value creation, and liquidity are necessary for long-term success. If you’re not profitable or if you’re not creating value, you are not going to have access to the cash you need for very long, and without capital, you are not going to survive.  Even a dynamic professional culture needs a strategy. Having an incredible group of extraordinary professionals focused on doing great things doesn’t ensure success.  Also, because someone is willing to loan you money doesn’t mean you should take it.

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It is that your choice of how you capitalize your company and assets ultimately dictates the actions you need to take. Developers frequently take the road that offers the most significant possible upside but sometimes don’t think about how capital structure creates risk in achieving that upside. Anytime you accept somebody else’s money, you’re giving up something. And you have to understand what it is that you’re giving up and how that impacts you personally. Development is an incredibly cash-intensive business, and when you’re short on cash, it ultimately takes away opportunities. So you must be thinking about capitalization at all times.

Self-financing, if you can do that, is fantastic, but you have to have a lot of conviction, or you need to have a heck of a lot of money. For developers trying to raise cash at the corporate level, you a clear plan, a market that you can utilize, and stay within your market area.  Selling to larger developers can be a rewarding situation, though it’s fraught with challenges because everybody is competing for capital. That inevitably creates a project hierarchy, and money flows to the most lucrative opportunities.  Raising project-level development capital is challenging and costly. Still, it does allow for some of the benefits of both self-financing, enabling you to control your destiny to a greater extent.

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