The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.
Securing debt for commercial real estate development can be exceedingly difficult. If you’re not already established financially, finding a partner who can back up your project is your best bet if you plan to secure debt to allow the project to move forward. Banks can have a fickle approach to securing this debt, and may change their minds at the last moment, leaving you out of your earnest investment.
How can you secure debt for construction or commercial real estate? So getting debt for real estate development projects is very difficult. You have to have a balance sheet, meaning you have to have liquidity, you have to have cash, you have to have a net worth, you have to have a guarantor, or even if you’re doing non-recourse debt, meaning not personally guaranteed debt, you still have to have a strong track record and you have to have lots of cash around and have liquidity. So, getting debt for construction, or even acquisition, is not an easy thing. You have to have number one first and foremost a very strong project that makes a lot of sense. You can’t be overpaying for something and expect to get good financing. So, securing debt for real estate projects is definitely, in my opinion, the hardest part about everything having to do with development, and construction, and acquisitions. Because banks are fickle, they’ll tell you that they’re going to do the loan and then right up to the last minute, 12th hour, they’ll say “Oh, you know what? The investment committee changed their mind and we’re not going to do this.” And then you lose your earnest money and it creates all kinds of messes.
So, finding a very strong partner who has a balance sheet, or has a very strong track record, or who would be willing to sign on the debt, is, I think, a necessity for when you’re getting started. It’s very difficult if you have no background and you haven’t done this before, or you don’t have a big net worth in order to get financing and secured debt for real estate development or acquisition projects. So, unless you do very low leverage in which case you’ve got to come up with an enormous amount of cash, in which case your returns aren’t going to be that great because you’re not getting much leverage. So this is definitely the trickiest part, and so my best piece of advice to securing debt is number one doing good projects, number two finding partners that are very financially strong if you’re not.