We tend to receive a 4 or 5 development/construction financing proposals weekly from current and/or prospective clients. More experienced developers will typically use a standard template for their financing proposals that encompasses the required information that any lender or equity investor would need to initially evaluate whether or not a potential project has merit. Less experienced developers tend to provide too little information or too much superfluous information which adds no value to the financing proposal. In either case (too little or too much info), the lender/investor will quickly dismiss any proposal that doesn’t contain the RIGHT information. Here is an outline of the information – by section – that should be included in a good development financing proposal (or any real estate financing proposal):
- Executive Summary – Gives the reader a quick overview of the transaction and should include the essentials of the proposal in 1 or 2 pages.
- Area Description – Should be brief and to the point. The objective should be to relate the description to the subject property with relevant facts and observations. You should be able to obtain information on an area from websites, newspapers, or magazines. The relevant area description and information should encompass the immediate area in which your project is located, not the entire city or state if it is not necessarily related to your project.
- Market Analysis – A good market analysis will include specific comps of properties that are near your development and that are similar in size and scope. Sometimes there are no similar properties in the area to compare. However, a solid third party feasibility report can provide estimates of future value based on the potential demand for the project. You should always submit relevant third party reports with your financing proposal because it gives an indication to the lender/investor that you are a legitimate developer. You will have most likely spent your own money to get the reports done to ensure an objective opinion on whether you have a valid project or not, which gives confidence to the financing source that you are indeed serious about your development.
- Property Description – Should be a brief description of the property describing the existing structure and what will be done with it; floor plans; site plans; and whatever else is appropriate to be included as part of the description.
- Financial and Economic Analysis – This may be the most important section. It tells how the entire transaction works in terms of dollars. In a permanent financing proposal in which the property is already built and is throwing off cash that can presumably support the financing requested, a single-page cash flow statement is probably okay to submit. A development financing proposal is a bit more complex and will require submission of your hard and soft cost budgets as well as a pro-forma cash flow statement. There is a time dimension element to development finance that should be incorporated into your budgets and pro-forma statements.
- Notes to Analysis – As part of the financial economic analysis, you should include explanations of key assumptions used.
- Resumes of the Key Principals – Very important section! When it comes to development financing (and any significant commercial real estate financing), it is important to include resumes and brief biographies on all principals owning 10% or more of the project. Why? Because lenders and investors want to work with successful developers with a track record. It reduces the execution risk for a development project. You can pretty much forget landing development financing if you are not willing to provide this significant piece of information.
- Maps, Photographs, and Exhibits – Pretty self-explanatory. A map of the area and photographs of the property should be included. Gives the lender/investor a conceptual framework in which to review the proposal.
Putting all elements together in a proposal will give the source of financing a clear picture of your project, which will lead to a quicker decision on whether or not that source can provide the financing you need.