JV Equity—Breaking Through the Glass Ceiling

By Jay Maddox, Principal, Avison Young

In today’s frothy capital markets environment, one might think developers have unending access to project funding. However, a closer look reveals a world of the haves and have-nots. Despite the apparent abundance of capital, many up-and-coming developers are bumping against a proverbial “glass ceiling” when it comes to raising equity for their projects.

Because of the heavy investor competition for fundamentally sound deals, it has become virtually impossible for smaller developers to acquire well-located property with favorable upside potential for development or adaptive re-use in gateway markets. Sellers are well aware of the abundance of capital and will gravitate to all-cash buyers who can close quickly. As a consequence, smaller developers who need to raise capital to close deals are being shut out of the very opportunities that are best suited to their niche expertise.

Many smaller developers who have tapped-out their personal as well as “friends and family” resources are now seeking new, sustainable joint venture equity relationships to take advantage of opportunities. Unfortunately, the barriers to entry are substantial for these newcomers to the JV world. If there isn’t a specific opportunity to pursue, equity investors typically don’t have much interest in cultivating a new relationship that may never bear fruit. Yet, when the developer has a short fuse opportunity (as most of the good ones are), the equity investor just can’t get comfortable fast enough to pull the trigger.

A joint venture relationship is very much like a marriage, so great care must be taken in building the relationship to ensure it is sustainable. The participants must not only agree on the economic basis for their partnership up front, but they also need to establish processes and procedures to deal with all the major decisions from inception to completion of the project. The partners need to have a mutual comfort level with decision styles and personalities.

Just as developers want sustainable equity relationships, investors far prefer to do multiple deals with the same developer rather than reinvent the wheel with a new sponsor every time. So, what can an up-and-coming developer do to break through this veritable glass ceiling?

• Prepare a business plan and presentation materials that highlight the track record and unique capabilities – it is key to stand out from the pack.
• If there are no current opportunities to pursue, consider offering participation in existing projects as a means to seed the relationship.
• If there are any skeletons in the closet, be forthcoming and truthful – the investor will invariably discover this in its due diligence, and failure to disclose is the kiss of death.
• Be realistic about development projections and the desired deal structure.
• Above all else, it is crucial to have real skin in the game.

The equity world is a cottage industry made up thousands of players from big private equity funds to family offices and high-net-worth individuals. They have unique preferences and biases in the types of projects and sponsors that they seek. So, despite the abundance of capital, it is a big challenge to find the right partner. Given the diversity of the equity investor world, it often pays to work with an advisor who has established relationships with these sources and can quickly focus on the most suitable potential partners.