GUEST BLOGGER: David Farmer
This week's blog is the first to be written by a guest blogger. David Farmer is a planner, developer, general contractor, licensed real estate broker and professional civil engineer as well as Founder and Managing Principal of Keystone Development Advisors, LLC. He also is a cofounder of Capital Four Advisors, LLC.
"Investors and lenders have a lot in common when it comes to real estate. Both investors and lenders want to minimize risk and optimize prospects for a return on their investment. Investors want to buy low and sell high, and lenders want to fund transactions at low loan-to-value ratios and keep their margins of safety high. The goals of investors and lenders have not changed since the real estate meltdown of 2006-2007. What is different these days is that the roles of investors and lenders have to some extent been switched. Investors are now "lending" their capital to fund purchases of distressed assets from lenders. There is quite a bit that lenders and investors can learn from each other. The present real estate market is making investors a bit more appreciative of underwriting standards and lenders a bit more appreciative of the complexities of owning and selling real estate.
There is always going to be risk for both investors and lenders. Risk is bad because it means there is a real possibility you will not get your money back. The best way to minimize risk is to increase knowledge. If you were going to bet on horses you would be wise to learn everything you can about each horse in the race so you can make the very best choice possible in predicting the winner. Investors need to understand not only the positive attributes of a distressed asset but also the underlying risks of zoning limitations, permit expiration dates, development bond repayment and environmental limitations. Lenders also need to understand these issues if they want to sell their distressed assets for the highest price possible. In a world where doubt equals discount, the more you know and understand the less doubt and hence discount will be applied to a given property.
Informed lenders retain experts in land development, many of whom are experienced, successful developers, to help them understand their assets and maximize their return of capital. Most commercial special assets will benefit from a professional review of the underlying issues and the identification of steps to improve value. Professional investors use teams to investigate potential acquisitions and minimize risk. Some lenders are using the professional review as a basis to give to appraisers so that a more accurate value can be established prior to putting the asset up for sale.
Too many times a lender will order an appraisal where seemingly similar properties are compared to estimate a value, when in fact the compared properties are not similar at all. For example a lender orders an appraisal on a 10-acre industrial property and the appraiser looks up recent sales of industrial property to arrive at a value. What the appraiser is probably not aware of is that any of the comparable properties, or the subject property, may have significant environmental limitations. If the comparable properties have environmental issues then the appraised value of the subject property will be lower. If the subject property has environmental issues, then its appraised value will be higher than what an informed buyer will pay given the environmental issues.
A professional review team also will find items or qualities that add value to a given property. Sometimes a property has impact fee credits or a historic type of zoning that can be vested by filing simple forms both of which can add significant value or capital recovery for the lender.
Uninformed investors and buyers have lost billions since the bursting of the real estate bubble, and one with money is nearly impossible to find these days. Knowledge is power in today's real estate market. Investors and lenders can gain valuable knowledge to help them buy or sell real estate by retaining a professional team, such as Capital Four Advisors, with years of specific knowledge and expertise in the development industry."
Wayne Falbey: Thanks, Dave! Your post is directly on point for the situation many lenders and investors find themselves in today. Projects have gone belly-up and the developer either is gone or no longer performing adequately.
The suppliers of capital for the project usually are not developers. They don't have an experienced understand of the day-to-day challenges that threaten to further devalue the investment they have capitalized. This is the time for them to become very proactive in bringing in a consultant team, such as Capital Four Advisors, to guide them in stemming their losses, restoring value to the investment, and disposing of the asset on optimal price and terms.
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