Preparing for your first conversation with development lenders

When construction company owners start transitioning into real estate development, there’s one common area where they tend to fumble the ball:

Structuring their first deal with a lender.

More specifically:

When talking to potential lenders, they show up unprepared.

Many owners couldn’t tell you what their debt to equity ratio is, what their capital stack looks like, or how much equity they can deploy.

And when the lender asks about these items and can’t get a straight answer, it puts them in an awkward spot where they have to coach the owner on what a properly structured deal is supposed to look like.

The above scenario isn’t a totally unforgivable sin...

But a lot of the real estate game is about building relationships.

So if you’re serious about building a real estate portfolio over the next 5 to 10 years, then you’ll need these people in your corner. Which means nailing these initial meetings should be a top priority.

Here are a few pointers on how to nail your initial meetings with lenders...

Most companies go wrong by laser-focusing on trying to get money from the lender straight away.

This is the wrong approach!

Instead, you should be trying to build up your network. And with any lender, you want to have multiple conversations, not just one.

The goal of the first meeting should (typically) be investigation.

Start by establishing a relationship with the lender, and show that you’ve done your research.

You should be able to talk intelligently about your company’s debt to equity ratio and capital stack.

You also want to find out what the lending environment looks like for them — asking questions about where they’re seeing the money flowing, and what projects they think are exciting.

The goal of the second meeting should be to show the lender that you know your project inside and out.

They’ll want to see that you:

• Have your market analysis ready to hand, with comps (comparables with similar projects in the area)

• Be able to explain your vision for the project, and why you think it will outperform the broader market

• Know your soft and hard costs in detail

A real-world case study from Highspire’s own backyard

There was a construction company we worked with just outside of Toronto.

They said they’d been talking to banks to secure funding, but no one would back them.

So instead, they came to us and asked if we could help fund their project.

But we could see right off the bat why the other lenders had turned them down — they didn’t try to establish a relationship with the lenders at all. They just presented the project and asked for capital.

On top of that, they didn’t have a solid explanation as to why the project would make money, with an over-inflated IRR (internal rate of return), and no long-term vision.

In short?

They were taking off a bigger bite than they could chew, and didn’t understand what they were getting themselves into.

We ended up working with them and helped them to package the project in a way that showed lenders the project was viable and worth investing into.

Ultimately, they didn’t end up securing funding, due to lack of experience and not having enough equity to deploy.

Despite that, this process gave them a solid foundation for what their next steps should look like — it was a valuable real-world experience that put them one step closer to eventually becoming developers.

Anyway, here’s the main takeaway from this story:

To give yourself the best chance of securing funding, you’ll need a clear understanding of what a good project looks like, so you can package it up in an attractive way for investors and lenders.

If you want to learn how to do this, you have two options:

You can figure it out the hard way (grueling trial-and-error through real-world experience).

Or, you can enroll in our real estate development and investment coaching program, where we’ll take all that stress and uncertainty out of the equation for you.

Inside, we’ll teach you everything you need to know to ace your first conversations with development lenders... and from there, how to leverage your construction expertise into a development portfolio that builds wealth while you sleep.

To learn more about applying, book a consultation call here.

Forward always,

Highspire