I cracked raising equity for DEVELOPMENT REAL ESTATE (not shovel ready) – Natu Myers of Raises.com – Investment Banking – Capital Raising
So before your deal is shovel ready and is ready to accept investors, should you start finding investors? I’m going to answer this question right now.
So somebody who just joined onto raises. com had an interesting question for me, uh, as we’re working on looking at his deal and seeing if it was time for him to hit the market and find investors. So this person in particular, uh, and this is a question that we get lot of our associates gets is mainly when somebody is looking to potentially raise capital, uh, For a new development.
So let’s say that they’re going to acquire a piece of land to develop some real estate. You know, there’s a process that people have to go through to make sure that the deal is ready to be built. And so when, when, when the deal is ready to be built, it’s called being shovel ready. And when a deal is quote unquote shovel ready, that means that all the permits, all the zoning, all the licensing has been complete and it’s time to just build the project.
It’s time to just raise capital to build the project if you don’t have the money to do so already. So some people in the process, they don’t, the deal is not shovel ready, meaning that if the deal is not shovel ready, that means that it is not ready to be built on because they still have to apply, you know, go through all the zoning laws to make sure that, you know, it’s zoned as, for example, residential real estate, because let’s say if somebody wants to build a residential real estate, they have to, it has to be zoned as a residential real estate.
Um, and there are different, you know, specific zoning requirements. And each state and each province and each country has their own zoning requirements, which allows some people to build certain types of buildings on top of it. And so until those things are in place, one cannot really build for a new development.
So when it comes to new developments, and then you don’t have the zoning complete, some people wonder, Hey, uh, some people are not even sure if they’re able to get the zoning requirements because it’s a risk and it’s called zoning risk. And the same thing with the permitting, like permitting risks. You know, if somebody is green, like golden, like You have to get permits to do this sort of thing.
In a developed country especially. So, you, you know, you need permits. And then you need, uh, licensing as well. If, if you’re doing, especially if you’re doing like a niche thing. Like for example, the people who are doing the cannabis deals or, you know, malls and all that. You need licensing for these types of things.
So, when it comes to all the things that are needed, um, should somebody find investors or seek to find investors before they’re sure that the things are, that they’re even going to get the zoning? Well, the quick answer is no. It’s not as simple as a yes or no. So, the advantage of finding investors early, before you know you’re going to have everything in place, is that raising capital is generally a long and hard process.
It takes a lot of work, and there’s no going around the point that raising capital is a lot of work. And so if somebody sees the opportunity to get prepared, to know what the investors would want, prior to the investors wanting what they know about, then, you know, It would make sense for somebody to focus on, on just getting the zoning and stuff like that, you know, and knowing what the market would want, because if an investor, if it takes six months for an investor to fund a deal, and you’re not sure if you get zoning until six months after you’re ready to begin, then that means that you just shortcut it.
You took a six month shortcut by starting early and knowing what the investor would want. And sometimes some people would actually You know, get their deals, you know, all set up and zoned and everything. And then sometimes you can’t find an investor to fund it. So instead of risking things by getting the deal zoned so that you can try to find an investor to then fund it, what you can also do is just make sure that you focus on getting the, getting market feedback.
To see if the investor would fund your deal prior to you getting it zoned, licensed and permitted. So if you have a choice in the deals that you can, you know, develop, you know, in your development deals, then you actually have some leeway and some wiggle room to be able to choose, uh, what deals you want to originate.
And so you can save yourself like a year of time if you do it in the right way. I guess the only downside is that if you work with an investor, uh, and if you try to, um, sell something. before it’s been zoned, the downside is that it may be more risky. And so if something is, hasn’t gotten the zoning, it’s licensing, and it’s permitting, and you’re working on selling it to an investor, it is definitely way more risky and it’s a riskier investment.
So the niche of investors who will be interested in such a deal will be smaller than if the deal is shovel ready. But if you can counter that fact by the fact that, you know, there are some investors that are willing to take that risk and compare it to the wide variety of. Projects that are sold to investors.
As a generality, you have crypto projects in, in develop in undeveloped countries and everything being sold to investors where people are investing. So if you consider like all the mass risk of projects that people have, and you know, just a development projects in the United States of America or any stable Commonwealth country or any emerging country that is really safe, then one can kind of not be too worried about that.
If you just find the investors that have the right risk profile, then And they don’t mind to have like a three to five year period of illiquidity, meaning that they won’t be able to get their money out because it would take five years to three years to for the deal to actually be developed. If you find somebody like that, then you may win.
But overall, just to summarize, number one, make sure that for the early stage development deals, if you don’t have the zoning licensee and permitting, and it’s not shovel ready, it still may make sense to reach out to investors to see what the mandate is. And if the deal number one, to shorten down the Sales cycle because raising capital is not a process that makes sense to be delayed.
Number two is sometimes you may have some choice in the deals that you zone permitted license. So why not just wait until you have an investor’s feedback prior to you getting a deal and working down the pipeline of you getting a deal all zoned and licensed, um, and, and permitted and shovel ready.
Because if an investor says, Hey, this shovel ready deal, you know, you get soft commitments for a deal and you get a lot of interest. It’s low, way less risky than If you just do everything blind and then last minute after you pay for all the zoning, the licensing and permitting investors flake on your deal.
And finally, I mean, there is a disadvantage to selling deals that are higher risk to the wrong population. So one has to have some tweaks and adjustments, adjustments to make sure that they work for investors that fit. So if all these things, if you’re looking to raise capital for, you know, either a private equity syndication or build your private equity fund for your new development deal or deals, just head to raises.
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