Why we don’t get capital from investment bankers

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Had a nice-but-unhelpful call with a real estate investment banker yesterday and thought the conversation would make for a good blog post.

First: What’s a real estate investment banker? That’s a fancy name for a person or company that connects operators (like us!) with debt and equity. Generally, “investment banker” is used to distinguish the players who can (at least theoretically) bring equity to the table from your standard loan broker, who just does debt.

Because we’re always on the look-out for capital partners, I have had a lot of conversations with investment bankers. But they never go anywhere, and here’s why:

  1. We have a spectacular loan broker. The price we pay her is fair. The service is excellent. Any time someone else has quoted a deal for us, their terms have been inferior. And I’m not going to take a risk on someone new, who might fail to execute, unless the terms are WAY better than what we’re seeing. So we don’t need real estate investment bankers to provide us debt.
  2. The equity investment bankers provide is, generally, on standard JV equity terms, something like: 9% preferred return, 80/20 split after return of capital and pref, low fees, and we have to put up 10-20% of the capital. Those economics make no sense for our business model, which involves long-term holds… we’re not going to sit there falling further and further behind the pref, hoping that the rents finally rise so that someday, decades from now, we can own part of the building. No thanks.

It turns out that intermediaries don’t really provide what we want: Investors who think like we do (improving neighborhoods, serious value add, conservative debt, long-term holds, etc.) and put enormous value on relationships (as opposed to “hot money” / transactional / one-off type deals).

And the reason they don’t is because they can’t make a fee from those introductions.

So, we are likely going to keep growing the way we always have: Through word of mouth, introductions from the service providers with whom we work, and readers of this blog.

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