Sizing Up A Development Deal – What Every Good Capital Source Looks For

By Alina Mardesich

Funding development deals, no matter where you are in the capital stack or the type of capital you invest, is not an easy task. So many variables can impact and jeopardize an investment. An inadequate budget, an inexperienced sponsor/developer, a miscalculation in timing or how long it will take to stabilize a project are just a few examples. Even if a savvy experienced developer with a strong track record, healthy portfolio and good access to capital knocks on your door, you’re only halfway there.

I have dealt with many middle-market developers and in the last two cycles, had great success originating and managing through highly structured and complex bridge and ground-up construction loans across many product types. I was fortunate to have witnessed these loans perform well through the economic downturn with a “near-perfect” track record in performance and repayment. For every deal that closed and was successfully repaid however, many deals were a “pass.” That said, finding the right deals can be a difficult task even in strong market conditions. Understanding what the investment could potentially look like in a down market takes time and patience.

A good “sizing up” involves a consistent theme of questions in a Sponsor/Developer interview.


Basis is the actual cash proposed or already invested in the deal with no imputed equity. There is no better way to start a development deal than with a great “buy” and great backstory. Is it an off-market deal? Or even better, a distressed sale off-market acquisition? If the answer is “no” and the basis is “market,” meaning the developer is acquiring the project by most likely being the highest bidder in a widely marketed opportunity, then you’re asking a prospective capital source to invest to replacement cost, with very little margin for error in the overall business plan. An off-market deal coupled with a good story, such as a distressed sale, first time on the market, or acquiring a bank-owned asset where the purchase price is at a fraction of the prior owner’s basis makes for a great start and gives an inherent overall “cushion” or “value-add” in the deal that translates to higher returns.


The real question goes beyond the obvious, “Toot your horn and tell me about your successes.” I follow with, “Tell me about your bumps and bruises.” I ask how the developer did in the previous cycle (we all remember how unpleasantly it ended) and how the developer navigated through the downturn. The answers tell a lot about character, integrity and the type of borrower/partner the developer will be going forward. Prior bankruptcies and/or foreclosures, for example, aren’t necessarily a deterrent to making an investment in the individual or company. Understanding why these events happened and how they were handled should always be explored. If the story is a positive one, more often than not, they make for a stronger sponsor. Everyone learns from adversity.


Developers are dreamers, visionaries and creative types. They see something that others don’t see and turn a piece of dirt or dilapidated warehouse, for example, into a vibrant place of business bustling with people, noise and the good kind of traffic. Doing that is a huge undertaking. No development project ever goes smoothly. Never mind that the market work has been done, the pro forma rents have been proven, the demand for the proposed project is strong and the numbers/returns look great — you have to imagine everything that can go wrong and find a solution for it, before it ever happens! It’s called mitigating risk or mitigating the worst-case scenario. Only after this exercise has been accomplished is the sponsor ready to ask for the bulk of the capital (debt). If you’re lucky, the opportunity shows up on your doorstep at this stage and it’s been adequately vetted. Getting there is the heavy lifting.


As if telling the story, presenting the data and finding the check writer isn’t difficult enough, now you have to make sure that all of the potential bad “what-ifs” are addressed and documented. More than likely, all of the equity has been invested in the deal at closing, and every dollar needed going forward to complete the business plan is being provided by, and is 100 percent controlled by, the lender. Unfortunately, most, if not all, of the following is likely to happen after closing: cost overruns, the need to reallocate budgeted dollars between line items or between hard and soft cost, insufficient contingency and a longer lease-up or stabilization time frame. A well-documented loan will guide the developer and the capital partners through all of these potential circumstances, such that when these “what-ifs” occur, they don’t immediately put the project/developer in default and there is both time and pre-conceived solutions to address them.


This is a relationship business more than a deal business. Good relationships will always lead to long-term success. Doing business with people you like and with whom you build trust will pay off tenfold. Plus, it’s far more pleasant! You will find over time that the real estate community is very small. This can be both good and bad as we build our brand, reputation and business.

Alina Mardesich

Alina Mardesich

Alina Mardesich is a broker/advisor with George Smith Partners, Inc. where she raises debt and equity for commercial real estate projects throughout the US. Mardesich has over 25 years of experience in CRE in the areas of new business development, asset management, loan workouts and loan originations with over $2.5 billion funded to date while employed at Fremont Investment & Loan and Oaktree Capital Management’s Real Estate Debt Fund. Mardesich’ experience also includes managing a $300 million portfolio of distressed loans at US Bank during the downturn as well as for the Archon Group during the previous recession.


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