Real estate development, in the simplest terms, is the process of turning money into properties that are ready to use.

There are a lot of steps involved in that process, and several ways a deal can “go sideways”.

In the predevelopment phase, physical plans for the actual property are created, including architectural drawings for the building(s), in conjunction with the creation of the financial pro forma, which consists of a budget and expected income from the completed property. Then during the development phase, that budget is deployed and the construction work takes place. All parties involved hope to project stays on budget, passes all inspections, and receives a certificate of occupancy on time. Finally, during the stabilization phase, the property is put to use and income is generated.

Since this process is so complex, in addition to evaluating the potential of a project on its own merits, lenders and investors closely scrutinize the track record of the developer.

This is especially true when the economic picture is uncertain. When many real estate investors and lenders are afraid of losing money on their investments and loans, only the most qualified borrowers are going to receive capital. While the United States is experiencing a volatile market with persistent inflation and the onset of banking failures in 2023, showcasing a strong track record is an absolute requirement of scoring a construction loan.

None of these count as a development track record

• Financial modeling expertise
• Fundraising credibility
• Construction management experience
• Strong design and engineering sense
• Entrepreneurial spirit

Bringing one or two of the skills above, even with a demonstrated track record within those functional areas, does not equate to a strong development track record.

All of these are a development track record

• Financial modeling expertise
• Fundraising credibility
• Construction management experience
• Strong design and engineering sense
• Entrepreneurial spirit
• Comparable past deals completed by the team

A strong development track record is when a development team brings it all together to successfully complete projects.

Trust me, I’ve got this

A lender told our team the other day that they are happy to work with borrowers that do not have principal-level development experience, as long as the project has strong fundamentals, because they understand that there are many talented people coming out of development teams at larger institutional real estate companies. This would be one of the few exceptions to the rule of only working with an established developer with a strong track record, because these people do have a track record of completing projects personally, even if their new entity would not yet reflect their capabilities, and past deals weren’t technically “theirs”. If they were directly employed by the principal owners to complete those projects and took an ownership mindset to completing them, it’s the next best thing.

Of course, the exception to a direct track record would be a borrower with an extremely strong financial picture. If the borrower’s net worth and liquidity are off the charts compared to the desired loan amount, and they are willing to provide recourse, that takes a lot of risk off the table for a lender.

For borrowers looking for funding that are confident in their project but have neither the track record nor an exceptionally strong development track record, finding a suitable Co-GP equity partner, if they can swing it, would be in order. From time to time, StackSource’s team will identify a promising deal whose sponsor lacks the requisite track record or financial backing, and introduce that sponsor to a strong Co-GP partner. Note that when this happens, the new partner will participate in all the General Partner fees and upside, unlike bringing in a large Limited Partner that invests passively.