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Factors Impacting the Ability to Obtain Real Estate Capital 

Factors Impacting the Ability to Obtain Real Estate Capital

By: Tim Littlejohn 

Real estate development, the lifeblood of communities, weaves its influence from small towns to bustling urban centers. This content is tailored to self-storage operators, offering insights into the world of real estate development financing. This exploration covers several key elements of this subject, starting with project initiation and ending with government involvement, presenting four key themes: crucial factors impacting project viability, external macro-economic dynamics affecting financing, micro-economic considerations shaping project success, and the nuanced role of the government in the real estate development landscape.  

The 6 Cs of Project Viability

At the core of any real estate project lies its viability. The essentials are cash flow, capacity, capital,  collateral, conditions, and character.  

  1. Understanding the cash flow dynamics of a project is like reading its financial heartbeat. Positive cash flow indicates operational viability and potential returns, while negative cash flow signals potential risks and difficulties in obtaining financing. 
  2. Capacity, on the other hand, investigates the borrower’s ability to take on debt in relation to income. It goes beyond just considering a high income and puts a focus on the ability to manage additional debt effectively.  
  3. Capital, in the financial realm, serves as a safety net. It is the cash invested in assets that acts as a buffer for loan repayment. 
  4. Collateral evaluations utilize metrics such as debt-service coverage ratio (DSCR) and loan-to-value ratio (LTV) to gauge a project’s financial viability. 
  5. Conditions encompass project alignment with lender interests, including terms, life expectancy, and project classification.  
  6. Character scrutiny evaluates the borrower’s credit score, profession, and history of fulfilling commitments. Lenders seek assurance that borrowers can be trusted to fulfill their obligations, and a great way to show this is a positive borrowing history. 

Therefore, creating a compelling narrative around these project-level factors becomes paramount for obtaining financing and securing favorable terms. 

The Economic Ecosystem and Your Project

Macroeconomic dynamics sound daunting, but they’re important in shaping your project’s financing landscape. Federal rates, migration trends, and global economic shifts are the players that need consideration.  

Understanding how federal money supply dynamics shape financing rates is critical for making informed decisions in a volatile market. Population migration patterns significantly affect the difficulty of obtaining capital. A mass exodus or significant migration can alter initial projections, making lenders less supportive of projects reliant on a growing or stable population.  

Global trends, including pandemics (e.g., COVID-19) and geopolitical conflicts, impact supply and demand dynamics. Developers and lenders must anticipate and understand how these trends affect the market and assess associated risks. Migration trends and global influences collectively influence the overall risk assessment and financing availability. 

 

In addition, fluctuations in federal rates can influence the cost of borrowing, shaping the overall financing landscape. Developers need to stay attuned to these macroeconomic dynamics to adapt their strategies accordingly, ensuring projects align with the prevailing economic conditions. If such strategies are mastered, a developer can be a step ahead and can better assess the risk of a “hold” or a “fold.”  

The Project's Micro-Economic Symphony

Now, let’s shift our focus to the micro-economic considerations, the heartbeats of your project. I’m talking about understanding the purpose of your project, assessing local population capacities, aligning rates with average median incomes, and fostering collaboration between public and private entities.  

Understanding the purpose of your project is like finding its beating heart. Feasibility studies act as the roadmap, guiding you through local demands, market trends, and potential collaborations. Collaboration isn’t just a buzzword — it’s the key to making your project financially viable. By aligning rates with local incomes, you ensure your project is not just a financial success but also a cultural and economic asset to your community.  

Average median incomes play a crucial role in shaping the rates you can charge in your development.  Understanding the income thresholds of your target market informs your financial projections and influences the overall success of your project. For instance, if your self-storage project caters to a market with a six-figure average household income, there might be a higher demand for luxury storage options,  such as boat and RV storage.  

Inversely, if the average income falls below the six-figure threshold, the market may have a lower appetite for such luxury storage options. These considerations highlight the importance of aligning your project with the economic realities of your local population.  

Public and private market collaboration is often necessary to make a project financially viable. This collaboration can involve creative financing solutions, such as using bonds instead of bank loans,  especially in projects where reputational risks may arise.  

Aligning rates with average median incomes ensures that development is accessible to the local population, increasing the likelihood of sustained success. Therefore, a thorough understanding of these micro-economic factors is essential for developers to create projects that are not only financially feasible but also clearly able to contribute positively to the communities they serve.  

Government Involvement

The government is a complex entity that can influence the success of your real estate project, and understanding its complexities is essential. Key aspects include navigating regulatory frameworks, adhering to conservation measures, and leveraging government incentives. By making these elements relatable, you can better navigate the intricacies of governmental influence on your project.  

  1. Regulatory stability safeguards consumers and ensures responsible lending practices. It acts as a protective barrier, preventing the kind of financial crises seen in the past. Government intervention is not always about stifling growth; it is often about ensuring sustainable and responsible development. It puts developers on an even playing field. 
  2. Conservation measures, while essential for environmental protection, introduce challenges that developers must navigate. Various federal entities work to protect wildlife and preserve land, introducing regulations that can impact development timelines. Some municipalities have certain times of the year when noisy construction equipment cannot be used, as it can cause issues with migration patterns for endangered species. While such measures are essential for environmental conservation, they can create challenges, such as delays and shifting financial environments. This key aspect in the development arena needs to be understood and considered in the early stages of a project.  
  3. Government incentives, such as the Community Reinvestment Act, drive lenders to support projects in underserved communities, fostering inclusive and sustainable development. This type of incentive-driven financing can spur development in areas that may otherwise struggle to attract investment. If properly utilized, these types of incentives can turn communities around and support the community members who believe in a brighter future.  

 

Deciphering all the different parts of real estate development financing demands a comprehensive understanding of project intricacies, macroeconomic dynamics, micro-economic nuances, and government involvement. Self-storage operators can leverage these insights to make informed decisions, collaborate strategically, and secure financing that aligns with financial goals and societal objectives.