Session #4 (Last) with Ruth Evans

Capital Markets Team Overview

  • Role and Focus
    • Primarily focused on multifamily deals historically.
    • Recently transitioning to include build-to-rent deals, and starting to cover industrial projects.
    • Current focus regions include:
    • Denver
    • Salt Lake City
    • Phoenix
    • Florida
    • Charlotte
  • Expertise
    • Multifamily deals: High expertise
    • Industrial and build-to-rent deals: Proficiency is growing

Capital Markets Definition

  • Interpretation at different companies:
    • At Crescent: This involves securing money for projects through equity and debt.
  • Responsibilities of the Capital Markets Team:
    • Financial modeling for projects.
    • Leading deals through investment committee processes.
    • Serve as liaison between development teams and investment committees.

Structure of Projects

  • Typical Structure:
    • Most multifamily and industrial projects are typically structured with 40% equity and 60% debt.
    • Distribution of equity:
    • 20% from Crescent
    • 80% from an LP (Limited Partner) partner
  • Initial Steps:
    • Finding an equity partner first under a cost-sharing agreement.
    • Collaboration on the due diligence process until closing.
  • Ongoing Responsibilities:
    • Addressing issues needing additional funds during a project's life.
    • Involvement in disposition processes and broker interviews.

Diligence Process with Equity Partners

  • Process Overview:
    • Developers locate and underwrite potential sites.
    • Capital Markets assists in underwriting.
    • Letters of Intent (LOIs) are signed post investment committee approval.
  • Important Considerations:
    • Rezoning risk management is crucial.
    • Depending on projects, targeting 10 to 20 potential equity partners based on previous relationships and requirements.
  • Dealing with Term Sheets:
    • Historically easier to obtain, but recent market changes have made this process more challenging.
    • Partners share pursuit costs pre-development. Usually a 50/50 cost-sharing model.

Debt vs. Equity Processes

  • General Comparison:
    • Market dynamics often result in one being easier to secure than the other; currently, debt is more accessible than equity.
  • Team Structure:
    • Separate VPs for equity and debt, with associates and directors reporting to them. Team members work across both sides.
  • Debt Process Timing:
    • Occurs approximately three months prior to land closure and construction begins.
  • Documentation Requirements:
    • Heavy emphasis on loan documentation, surveys, and appraisals.
    • Short timelines involved in the debt process with significant relationship focus.

Key Terms in Term Sheets

  • Equity Partners:
    • Focus on capital contributions, distributions, governance, and exit rights.
    • Critical to have favorable waterfalls in financial structures and cost-overrun recovery.
    • Emphasis on minimizing partner approvals for operational autonomy.
    • Goal to exit deals quickly after stabilization.
  • Debt Partners:
    • Aim for maximized loan proceeds at the lowest interest rates with minimal guarantees.
    • Typical loan-to-cost ratios of 60%; current interest spread observed is around 7% + 260 bps.

Case Study: Multifamily Development in Denver

  • Specific Project Overview:
    • Closed on a multifamily deal connected to the Flatiron Mall in Denver.
    • Land seller also served as the equity partner, creating negotiation complexities.
    • Creative deal structuring:
    • Lowering land contribution to keep project financially viable.
    • Introducing earn-out structures for land proceeds post-hurdle reach.
  • Debt Structure Challenges:
    • Project sought a $77 million construction loan, necessitating two banks to syndicate due to individual lender limits (e.g., max cap of $35 million).
    • Collaboration with Bank of Texas and Pinnacle Bank for favorable terms.

Challenges in Real Estate Development

  • Identifying Major Risks:
    • Construction overruns exacerbated by unforeseen events like COVID supply chain issues.
    • Subsurface conditions impacting financial liability.
  • General Underwriting Concerns:
    • Errors in attention to detail can lead to mistrust by equity partners.
    • Internal vs. external modeling assumptions can differ, requiring strict version control.

Tips for Aspiring Capital Market Professionals

  • Importance of Attention to Detail:
    • Precision is vital in presenting models to equity partners; errors compromise trust.
  • Building Relationships:
    • Continuous engagement and transparency with partners during project challenges strengthens trust.
  • Transitioning into the Field:
    • Learning through a blend of finance and development roles enhances understanding and efficiency.

Final Insights for Students

  • Encouragement for Aspiring Professionals:
    • Advice to maximize learning during critical early years in career.
    • Importance of being proactive, asking questions, and being open to all opportunities.
    • Recommendation to start with financial roles for grounding in underwriting models.
  • Networking and Continuous Learning:
    • Relationships built now can benefit long-term career growth.
    • Staying informed on project developments increases professional insight.