Raising capital to keep up with opportunity

[Eric Sullivan]

My question: For seasoned investors, have you had success bringing someone in to help raise capital for projects? If so what did that structure look like? Where they salaried? % of capital raised? Partner? I am sure there are different ways to go about this but interested to hear different experiences that worked.

Background on us if the context helps
The quick summary of our business is in 2020 we have purchased about 10.5 m in RE in one New England town. We currently are developing 28 luxury condo units across 5 projects and have some holds/airbnbs. Average deal size is 3-10 units. These developments are either full gut rehabs in the realm of 300-400k per project to new construction around the 1.1m. We self perform the construction management due to terrible experience hiring GC's in our area. 

Being extremely focused geographically has worked well for us. The last few years we have learned who the players are and know the town intimately. Which in turn our off market deal flow is through the roof right now, over 100m. But where our business needs support is on the capital side which is purely due to time available. From operations of the business daily and then the managing of projects, it really does consume both myself and my business partners full effort 6-7 days a week. Which we are happy to do because we love RE and have done pretty well so far on the return front. Basically our deal flow and ability to execute has outpaced the capital we have to acquire deals to hit the runway that I have forecasted through our 2021 strategic planning effort in Q4.

My question to the more seasoned investors out there is, have you had success trying to bring someone in to help raise capital, or find investors to set meetings? I know this is not a challenge that I am alone in tackling, and with our decision to self perform the construction management side (which I am not willing to give up because of the level of quality we hold ourselves to) the obvious first answer, "hire a GC" I don't think is the right solution at least for our business.

Sorry for the long post and I appreciate any and all insight.

[Lance Pederson]

My business partner, Matt Burk, wrote a whole book about this subject you might want to check out.

Due to securities laws you can only compensate registered professionals on a performance basis (e.g., % of capital raised) whether they are employees, subcontractors, placement agents or otherwise. This is what makes solving the problem so difficult. 

The two models I see most often used are bringing on another partner to handle the capital side of the business. They will usually form a new entity that only receives the asset management fees and the promote earned on the projects where external capital was raised. The development fees would go to another entity that you and your current partner control.

The other way to go is to hire an employee to head up Investor Relations. You could pay them a base salary and structure something where they get a % of the Promote/Profit earned from the projects.

As Matt lays out in his book, some type of pooled vehicle or syndicated entity ends up becoming part of the solution as well. Said another way, having investors borrow money to OpCo doesn’t scale very well. You need to bifurcate the functions of the business. In this case, you will have a development company and a capital management company.

Hope this helps!