Commercial Development Pacific Investment Management Fund: Improve Funding

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My close friends and colleagues who are successful developers of real estate have told me that they have struggled to find funding. Mitch is a Newport Beach-based developer who said, “From receiving 70% to 90% of an apartment complex’s construction costs at 5-8% annual interest rates in the 90s and 2000s I now get offers of up to 30% of cost financing. Even the best projects have now been turned away by banks because of their refusal to loan based upon poor decisions.

The majority of these projects will fill an important gap in construction employment, creating thousands more construction jobs. Pacific Investment Management Fund is a well-respected private mortgage company in Irvine, California. I asked the vice president of lending what types of projects he was funding. In the private lending industry, often referred to as “hard-money lenders”, they are trying to close the funding gap created by institutions due the credit market freeze. I had a two-hour conversation with Joseph at Pacific Investments’ mahogany conference tables overlooking Newport Beach’s Back Bay. He gave the following tips or guidelines for those looking for financing to finance their real estate or development project.

Brian Joseph, vice president of lending at Pacific Investment Management Fund.

1. A good presentation is very important. Spend a few hours preparing a brief, well-organized summary. You should paint a picture of what the project will look like and why the project is important in the current real estate market. This can be accomplished by presenting a neatly organized packet.

2. Ask a CPA for help with the pro-formas, or to review the financial status. Incorporate these ratios into any commercial projects: Return on Investment (ROI), Breakeven Point and Vacancy factor using low industry standards.

3. A conservative appraisal is the best. The wholesaler is not the target of many appraisals. The inflated value is more likely to kill a project than anything else. Real estate appraisers are advised to add the wholesale value for developers. Developers can then see their true profit margins, and make adjustments to cost factors.

4. You should bring on a partner if you want to borrow more than 65% of the value of a project, and your client lacks the cash for the rest 35%. It is important to have a partner to share in the project’s risk. This is what lenders look for. The client is usually the one who takes home the biggest share of profit, so it’s important that they take on the same amount of risk.