Raising capital in the Independent Broker Dealer (“IBD”) community can be costly, time-consuming, and not always successful. Why then go through this process?

1. Friends and Family Dry Up – Real estate professionals generally start out raising equity capital from friends and family. No matter how successful the investments may be, eventually the need for equity tends to outpace what current investors have available to invest.
2. Institutions Dominate – A partner prepared to cover 80 – 90% of the equity needed for an investment may be a gift from above.  They can be fickle, and at the last minute, may  move their commitment to another investment which better fits their then profile for ideal investing. They also can be unreasonable in deciding when to force a sale, because it fits their then investment formula, even if the timing does not maximize the value of the property (which would be when you as the general partner would earn most of your profit).
3. Public Too Expensive – It will cost millions for legal, accounting, underwriting, and marketing to bring a publicly registered offering to market. In the untraded world, anticipate risking $15,000,000. In the traded world, for instance, a REIT will not be supported by institutions unless it owns over $5 billion of assets. Public is just not a rational next step for most successful real estate operators.
4. Sized Right – Offerings in the IBD are adjusted to the next size appropriate for a real estate firm. If you reach too far too fast, the market will pull back, concluding that the firm does not understand their own capacity to grow. Match your “ask” (size of your offering) to your rational “can do” (prior performance plus perceived progress potential).
5. Repeat Customers – As the real estate firm proves concept, investors will return for additional investment.  Show that the firm has raised capital, invested capital, returned capital (as projected) and maintained consistent quality communication with the investors. Nothing succeeds like success.
6. Grow with You.  The investment chain – IBD, registered representative, investor – will follow you as you successfully grow from one property specified, to a substantially blind pool, to a non-traded REIT. Some will also follow you as you go broader into development, or 1031 DST, or into new asset classes.  It all depends on consistent success of walking your talk and delivering your promises.
7. Opportunities for Creativity – Sometimes an opportunity arise which is out of the normal box.  The IBD community will entertain new asset classes and structures. If the story is logical, and the company has appropriate expertise and history, you may find acceptance of something just a little different from what anyone has done before!

BOTTOM LINE

There is no one way to access capital. There are, though, stages a firm must go through to have creditability in the next market up the capital market stairs.

Reach out (rick@chesslawfirm.com) when you are mapping out your game plan. Happy to give insight which may help you save time and money.