Kirk Goodrich and his team at Monadnock Development have found the right partners.
The for-profit company closed eight joint-venture transactions between 2011 and 2013.
Each transaction involved a nonprofit joint-venture, so finding trustworthy partners who would hold up their ends of each deal was crucial.
During a session at AHF Live: The Affordable Housing Developers' Summit in Chicago on Nov. 21, Goodrich, development director at Brooklyn, N.Y.-based Monadnock Development, recommended five key areas to consider before striking a deal.
Property, experience, financial strength, political contacts, and established network are the five elements needed for a deal to work, and deciding beforehand how each piece fits into a transaction will help both partners realize how much is being contributed and from where.
“It’s a useful exercise because by the time you get through the list and you go through who is doing what and you agree that these are the five general things you need to execute a project,” he said. “People have a sense of what they’re doing and what we’re doing.”
Goodrich warned against taking advantage of a potential partner by writing them into an unfair contract just because they’re vulnerable for wanting to get a deal done.
“The relationship is much more important than the deal,” Goodrich said. “We tend to turn down 75 to 80 percent of everything we see. People think we’re picky, but I think that’s important for relationship management sometimes.”
Reputation is a big deal when searching for adeal partner, panelists said.
Another issue to discuss before signing on the dotted line is the future of the community and exit strategies.
Investors are looking for four key elements in a joint-venture deal, said Ryan Sfreddo, managing director in investor relations at New York City-based Red Stone Equity Partners.
Investment partners will scrutinize markets, underwriting, sponsorship, and trust before deciding to seal the deal or walk away.
Market is important to making a deal work. Investors want to see population and job growth trends as well as public transportation proximity and how accessible services are to the potential resident community, Sfreddo said.
“It’s a real estate deal at the end of the day,” he said. “It’s affordable housing, as we all know, and it’s location, location, location. It’s real estate fundamentals, and those are no different here than with a market-rate deal.”
Underwriting is crucial as well as investors are checking contingency levels, capital stack, coverage, capable guarantors, and a cash developer fee. A capitalized operating reserve also bodes well to investors looking for stable partnerships.
“These are 15-year partnerships, we like to see their pot of money set aside to handle the deficits,” he said.
Sponsorship is another key for investors. Having a good track record, a healthy real-estate owned portfolio, financial health, and an experienced, capable developer will catch an investor’s attention, Sfreddo said.
The relationship will fail without trust, so investors are interested in seeing a development team ready to execute and carry out the business plan.
“This is all about partnerships—long-term engagements and being able to look your partner in the eye and have a belief that they’re going to do the right thing,” he said.
Investors also use instinct to evaluate a partnership.
“(Another thing we are looking for) is making sure the development team is not doing the deal just to feed the machine and collect a fee but they’re in it for the long term,” he said.
Goodrich agreed and said guarantors must be mindful of intention.
“Often when you are called upon to act as a guarantor or a JV partner on a deal that’s been around a little bit, the inclination may be to really squeeze the nonprofit or for-profit partner really hard because they’re in a position where they want to get their deal done,” he said.
But taking advantage of a vulnerable situation will end up staying with a company’s reputation in the long run, Sfreddo said.
“This is really small industry, and I think reputation is everything,” he said.” At the end of the day, our reputations are first and foremost and hopefully making a few dollars is down the line.”
