The kind of risk we take

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Was talking with an investor earlier this week about possibly financing our next ground-up deal.

He considered our proposed deal structure and said, basically, “You guys aren’t taking any risk”. Which is sort of true, because we proposed to not put our own money in the deal. Instead, we were offering to backstop losses, partially fund overages, etc.

But, at a deeper level, his observation is not really true, because we are risking something that’s considerably more limited than investor money: Our time.

Compare our situation to an investor sitting on cash: He’s got an almost infinite array of investment options, both within the real estate space and across the broader investment landscape (stocks, bonds, etc.). He can easily parcel his money up among different opportunities to get at his own particular mix of risk / reward.

That is not us. When we take on a project, it means we can’t do some other project. And, because of how these deals are structured (with the investor getting his money back AND a good return before we participate in the profits), we need to be damn sure that we’re using our limited bandwidth on projects that are going to pay out sufficiently well to get the investor what he needs AND get us what we want.

Also, and perhaps more important, we are risking our good name. We are in the process of building a track record which we ultimately hope will attract investment in the hundreds of millions of dollars. You only get to raise that money by executing, over and over and over again, on smaller projects.

So, while our proposal didn’t include any of our own capital, we’re definitely taking risk. More, in some ways, than someone who trusts us with a small piece of their capital.

 

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