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Attract Finance Partners Like Bees to Honey
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One of the expressions I hear a lot in the Property Development space is essentially: if you find the deal, the money will come.
Sounds great, right?
In theory, yes, it does. But reality looks a little different.
Most development deals involve a lot of money, and very few Finance Partners are going to hand their money over to a Property Developer without some pretty major due diligence first.
Which means that if you're the one with a cracker deal and you need an Investor, waving the deal around in the air and saying "here it is, come and get it!" definitely isn't going to cut it.
So what do you need to do if you want an Investor to seriously consider investing in the deal you've found?
Sounds great, right?
In theory, yes, it does. But reality looks a little different.
Most development deals involve a lot of money, and very few Finance Partners are going to hand their money over to a Property Developer without some pretty major due diligence first.
Which means that if you're the one with a cracker deal and you need an Investor, waving the deal around in the air and saying "here it is, come and get it!" definitely isn't going to cut it.
So what do you need to do if you want an Investor to seriously consider investing in the deal you've found?
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The answer is two letters - IM.
IM stands for Information Memorandum, and if you don't have an IM prepared for potential Investors, your chances of them taking you seriously and handing over some big dollars for your project are massively reduced.
Essentially, the purpose of an IM is to present all the details of the deal in a professional format, so your potential Investor can have confidence that your deal really is a cracker deal, and you know what you're doing. It's like an FAQs document for the project.
Fine, I hear you say, I get that I need a professional IM. But I have no idea what to put in it. Where do I start?
Excellent question, so let's step through all the various bits and pieces that go together to make a professional IM which will have Investors ready and willing to invest in your cracker deal.
IM stands for Information Memorandum, and if you don't have an IM prepared for potential Investors, your chances of them taking you seriously and handing over some big dollars for your project are massively reduced.
Essentially, the purpose of an IM is to present all the details of the deal in a professional format, so your potential Investor can have confidence that your deal really is a cracker deal, and you know what you're doing. It's like an FAQs document for the project.
Fine, I hear you say, I get that I need a professional IM. But I have no idea what to put in it. Where do I start?
Excellent question, so let's step through all the various bits and pieces that go together to make a professional IM which will have Investors ready and willing to invest in your cracker deal.
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What Do You Need?
Now, a lot of Investors are busy people. They potentially see multiple deals coming across their desk every week. So quite frankly, they don't want to waste time wading through your IM to have their most important question answered - what do you need? Because if you need a million dollars for 12 months, but the Investor can only lend it to you for 6, then it's a waste of their time to read the whole document. The deal isn't going to work for them. You also need to be clear about what form that investment needs to take: Cash? Equity? Serviceability?
So don't beat around the bush. Instead of thinking of the IM as a whole lot of information leading up to the ultimate reveal of what you need when the Investor is already convinced how great the deal is, go topsy turvy and start with the end in mind. If what you need fits what the Investor has, then the rest of the IM will do the job of showing them why they should say yes.
Return on Investment
And second in line to saying what you need, make it clear the type of return you're offering the Investor. Is this going to be a short-term money loan, with a fixed rate of interest paid monthly? A construction loan with a percentage profit split at the end? Is interest capitalised? There are plenty of ways to use Investor funds in a deal, so be clear what type of loan you need and at what stage of the deal the return will be paid.
Security
The Investor lending you money is taking a risk, so you need to show what security you're giving them in order to minimise that risk. Some of the most common ones are:
Be aware that the lower the level of security, the higher the interest rate you're likely to be paying.
Timeframes
Although the timeframe of the loan should be outlined, other timeframes may also need to be mentioned. For example, rather than a lump sum accruing interest from day one, you may plan to draw down the loan funds over a couple of payments, when money's needed for specific stages of the project, saving yourself some interest costs in the process.
As a final note on telling the Investor what you need - never say that any return is guaranteed. While you may have every intention of making sure the project is a success, things don't always work out that way. There's also a whole bunch of legal reasons why you should never use the word "guaranteed", but I won't bore you with the details here. Just don't say it in your IM.
Project Overview
In your IM it's now time to move on to information about your project. First up is to outline what the project is. For example:
This section should also cover things like expected timeframes for the different stages of the project, such as 9 months to get both Development and Building Approval, then 9 months to construct the duplex, then 3 months to market and settle on the end product.
As part of the overview, indicate whether there may be an opportunity for the Investor to exit at any of those milestones. As an example, the Investor could choose to exit after all the approvals have been obtained, as the numbers indicate it would be possible to get construction finance at that point.
Be clear about potential exit strategies. Plan A may be to see the project through to completion before selling all the end product, but Plan B might be to sell the property as a DA approved site. Plan C may be to hold the duplex and only sell the existing house. Be clear about the alternatives.
Now, a lot of Investors are busy people. They potentially see multiple deals coming across their desk every week. So quite frankly, they don't want to waste time wading through your IM to have their most important question answered - what do you need? Because if you need a million dollars for 12 months, but the Investor can only lend it to you for 6, then it's a waste of their time to read the whole document. The deal isn't going to work for them. You also need to be clear about what form that investment needs to take: Cash? Equity? Serviceability?
So don't beat around the bush. Instead of thinking of the IM as a whole lot of information leading up to the ultimate reveal of what you need when the Investor is already convinced how great the deal is, go topsy turvy and start with the end in mind. If what you need fits what the Investor has, then the rest of the IM will do the job of showing them why they should say yes.
Return on Investment
And second in line to saying what you need, make it clear the type of return you're offering the Investor. Is this going to be a short-term money loan, with a fixed rate of interest paid monthly? A construction loan with a percentage profit split at the end? Is interest capitalised? There are plenty of ways to use Investor funds in a deal, so be clear what type of loan you need and at what stage of the deal the return will be paid.
Security
The Investor lending you money is taking a risk, so you need to show what security you're giving them in order to minimise that risk. Some of the most common ones are:
- first mortgage security
- second mortgage security
- mortgage over another asset
- caveat over the property
Be aware that the lower the level of security, the higher the interest rate you're likely to be paying.
Timeframes
Although the timeframe of the loan should be outlined, other timeframes may also need to be mentioned. For example, rather than a lump sum accruing interest from day one, you may plan to draw down the loan funds over a couple of payments, when money's needed for specific stages of the project, saving yourself some interest costs in the process.
As a final note on telling the Investor what you need - never say that any return is guaranteed. While you may have every intention of making sure the project is a success, things don't always work out that way. There's also a whole bunch of legal reasons why you should never use the word "guaranteed", but I won't bore you with the details here. Just don't say it in your IM.
Project Overview
In your IM it's now time to move on to information about your project. First up is to outline what the project is. For example:
- land subdivision
- knock down a house and build 4 townhouses
- renovate the existing house and put a duplex in the backyard
- etc
This section should also cover things like expected timeframes for the different stages of the project, such as 9 months to get both Development and Building Approval, then 9 months to construct the duplex, then 3 months to market and settle on the end product.
As part of the overview, indicate whether there may be an opportunity for the Investor to exit at any of those milestones. As an example, the Investor could choose to exit after all the approvals have been obtained, as the numbers indicate it would be possible to get construction finance at that point.
Be clear about potential exit strategies. Plan A may be to see the project through to completion before selling all the end product, but Plan B might be to sell the property as a DA approved site. Plan C may be to hold the duplex and only sell the existing house. Be clear about the alternatives.
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Due Diligence
In order to know you have a cracker deal, you will have already done substantial due diligence. So this is your opportunity to share the research you've done up to this point.
Part of this will be outlining the demographics of the area. Why is this project right for the area? Does your end product suit the needs of the target market? For example, if the demographics show the target market for new product in the area is older couples downsizing, they're not likely to be interested in a 2-storey townhouse. Ageing knees don't like stairs very much!
Another element to look at is supply and demand. Who are your competitors in this space? How many are there? What other product is on the market right now? What is it selling for? Are you able to have a point of difference in the market that will be of benefit to your buyers?
Essentially you want to show there's market demand for the type of product the project is creating, there's plenty of people wanting to buy it, and currently there's not enough supply to meet that demand.
In order to know you have a cracker deal, you will have already done substantial due diligence. So this is your opportunity to share the research you've done up to this point.
Part of this will be outlining the demographics of the area. Why is this project right for the area? Does your end product suit the needs of the target market? For example, if the demographics show the target market for new product in the area is older couples downsizing, they're not likely to be interested in a 2-storey townhouse. Ageing knees don't like stairs very much!
Another element to look at is supply and demand. Who are your competitors in this space? How many are there? What other product is on the market right now? What is it selling for? Are you able to have a point of difference in the market that will be of benefit to your buyers?
Essentially you want to show there's market demand for the type of product the project is creating, there's plenty of people wanting to buy it, and currently there's not enough supply to meet that demand.
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Comparables
Next thing to include is comparables in the area, both in terms of the property you're purchasing (if you haven't already purchased the property you're developing) and for the end product. The numbers you've used in your feasibility for Sales Revenue need to be backed up by solid comparables, not just blue sky figures that you're hoping to achieve.
Specifications
This ties in to the research you've already done around your target market. What level of finish are you planning for your project, if you're going to be building? Your demographic research will have told you whether your target market is more likely to be Investors or Homeowners. This is a really important distinction to make.
Investors are going to want a product that is appealing, but at the same time robust enough to take the inevitable knocks and bumps that happen in the rental market. They're mostly going to be driven by the numbers around vacancy rates and rate of return. Homeowners, on the other hand, are much more swayed by the "wow" factor, and are not so concerned about having something generic and low maintenance, as they will be taking care of the property themselves.
The level of detail in this section may depend on whether or not you've already begun the project. If there are subdivision plans drawn up, or floor plans, renders etc because you're already well into the project, then include those too.
Issues and Challenges
Always include an outline of issues and challenges you know you need to overcome during the project. What type of constraints are Council likely to put on the development? For example, are there likely to be issues around overlooking neighbouring properties, which will require the back townhouse in a group to be single-storey. Wherever possible, once you've identified the issue, include details of how you've solved it, or plan to solve it. Don't just include a list of challenges with no solutions.
Team
This section is always important, but if you're a new Developer, then it's vital. Any Investor is going to think twice before handing their money over to a complete rookie, so you need to show that although you as the Developer might be a rookie, you have plenty of experienced people on your team who will bring the necessary knowledge and experience to the table. This is known as borrowed credibility, and it makes a big difference.
Some people to include here, depending on the size and type of project, are:
Feasibility
And lucky last in your IM is the feasibility for the deal. Often the full feasibility can be a bit overwhelming, so it's worth trying to keep it simple. The best way to do this is to use categories rather than individual line items. So you might have a category in the feasibility called "Development Approval", which is the total of 15 individual line items. Make sure that you do have the breakdown of all those line items available, so you can provide the full spreadsheet if requested.
Now that you have all the content for your IM, there's only one thing left to do - put it all together in a professional manner. This is NOT something you chuck together at a moment's notice on the back of an envelope. Take the time to make sure it's well written, and presented in an attractive way. If you don't have the computer skills to do that, then pay someone else to take your information and prepare it for you.
Because, as I said right at the start, Investors are potentially looking at multiple deals every week, so if you want to attract those bees, make sure yours is one of the most appealing, well-crafted honeypots they're looking at.
Next thing to include is comparables in the area, both in terms of the property you're purchasing (if you haven't already purchased the property you're developing) and for the end product. The numbers you've used in your feasibility for Sales Revenue need to be backed up by solid comparables, not just blue sky figures that you're hoping to achieve.
Specifications
This ties in to the research you've already done around your target market. What level of finish are you planning for your project, if you're going to be building? Your demographic research will have told you whether your target market is more likely to be Investors or Homeowners. This is a really important distinction to make.
Investors are going to want a product that is appealing, but at the same time robust enough to take the inevitable knocks and bumps that happen in the rental market. They're mostly going to be driven by the numbers around vacancy rates and rate of return. Homeowners, on the other hand, are much more swayed by the "wow" factor, and are not so concerned about having something generic and low maintenance, as they will be taking care of the property themselves.
The level of detail in this section may depend on whether or not you've already begun the project. If there are subdivision plans drawn up, or floor plans, renders etc because you're already well into the project, then include those too.
Issues and Challenges
Always include an outline of issues and challenges you know you need to overcome during the project. What type of constraints are Council likely to put on the development? For example, are there likely to be issues around overlooking neighbouring properties, which will require the back townhouse in a group to be single-storey. Wherever possible, once you've identified the issue, include details of how you've solved it, or plan to solve it. Don't just include a list of challenges with no solutions.
Team
This section is always important, but if you're a new Developer, then it's vital. Any Investor is going to think twice before handing their money over to a complete rookie, so you need to show that although you as the Developer might be a rookie, you have plenty of experienced people on your team who will bring the necessary knowledge and experience to the table. This is known as borrowed credibility, and it makes a big difference.
Some people to include here, depending on the size and type of project, are:
- Town Planner
- Civil Engineer
- Architect
- Mentor
- Lawyer
- etc
Feasibility
And lucky last in your IM is the feasibility for the deal. Often the full feasibility can be a bit overwhelming, so it's worth trying to keep it simple. The best way to do this is to use categories rather than individual line items. So you might have a category in the feasibility called "Development Approval", which is the total of 15 individual line items. Make sure that you do have the breakdown of all those line items available, so you can provide the full spreadsheet if requested.
Now that you have all the content for your IM, there's only one thing left to do - put it all together in a professional manner. This is NOT something you chuck together at a moment's notice on the back of an envelope. Take the time to make sure it's well written, and presented in an attractive way. If you don't have the computer skills to do that, then pay someone else to take your information and prepare it for you.
Because, as I said right at the start, Investors are potentially looking at multiple deals every week, so if you want to attract those bees, make sure yours is one of the most appealing, well-crafted honeypots they're looking at.
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