Rising-Star Developers and Co-GP Backing
Los Angeles, CA
Real estate development is a complicated process that can often take years to go from vision to final completion. At the earliest stage of a development project, capital is essential. Capital is necessary for acquisitions and pre-development costs.
Often times, a development project’s earliest phase can be the riskiest one for a capital provider. While development risk can achieve great returns, when a developer is an up-and-coming entrepreneur, simply having a great project is not enough.
“Most opportunistic real estate strategies add intrinsic physical improvements to a project,” says William C. Wells, founder and CEO of Milestone Partners, and partner with the Bascom Milestone Ventures. “Pre-construction carries the risk that your project will be denied by the governing municipality and you will have thus failed to create value with your investment.”
Organizations like Milestone Partners are also known as Co-General Partners – or Co-GPs. Working with Co-GPs is one way for young developers to obtain enough capital to subsidize their deals.
A Co-GP is an organization or entity that can help provide equity for riskier activities during the development process, such as land acquisition and pre-development costs. The Co-GP can also provide the necessary infrastructure and back-office support to the developer.
While the idea of co-investing isn’t new, there has been a Co-GP surge in recent years. Co-GPs believe that developers identify opportunities and produce a tremendous amount of value during the pre-development phase of a project.
How Does It Work?
Co-GPs are willing to provide the capital and infrastructure needed to support developers in moving ahead on their projects. They partner with developers to help bridge the developers’ capital gap and provide assistance in the procurement of debt financing. Often developers and Co-GP’s rely on private lenders for debt financing as traditional lending sources are unwilling to take on entitlement risk. Furthermore, private loans, by providing higher leverage, can allow developers and Co-GPs to increase their returns.
“As a private lender, we’ve had positive experiences working with Co-GPs and their development partners,” says Elliot Shirwo of Bolour Associates. “Private money is becoming an important alternative source of financing for entrepreneurial developers and Co-GPs as they work to build the most lucrative capital stack.”
Real estate development will always have inherent risks. For now, Co-GP’s are willing to take on early stage risks by offering capital, infrastructure and back-office resources while private lenders are providing debt at higher levels of leverage to maximize returns.