Finding capital is one of the most difficult aspects of any development. Very often trying to align objectives, and share risk, between the investor and the developer means re-envisioning the project.
However, when a capital provider gets to know a developer, and vice versa, understanding common objectives and agreeing on a targeted payback, the equation changes. A long-term relationship can create new dynamics for business success.
But, long-term relationships in housing can be difficult. Many times, as Phil Tague, president of AMLI Residential, points out, there's a high likelihood that people's priorities can change, especially with large capital providers and large development platforms shifting the dynamics of the relationship.
“You can get relationships that can last a long time, and you can establish a course that can go beyond what's written down in a JV partnership,” Tague says. “They may change and new regimes may upset old relationships.”
John Darby, CEO of The Beach Co., a development firm based in Charleston, S.C., is a big advocate of creating long-term relationships with investors that will lead to future opportunities. In the past decade, his firm has developed more than $1 billion in assets with an additional $1 billion in the pipeline in 15 different cities in the Southeast.
Darby sees the shift that the cost of capital is going through, growing from where The Beach Co. was five or 10 years ago. With safe harbors, stabilization, and tax risks considered, there are many potential complications a strong relationship can help ease.
Darby is experimenting on a couple of projects with crystallization, otherwise known as freezing the asset, to get a better return. The crystallization process would protect Beach if values were low when the property stabilized, so the company wouldn't have to lose interest to its capital partner.
“We want to go through the cycle and still have a profitable deal at 10 or maybe even 15% return,” Darby says. “A crystallization basically allows you to recognize your promote without selling the project once it's stabilized. [It’s a] structure that allows the sponsor to receive their promote at stabilization and continue to own the project.”
Darby also points out that many capital sources won’t get involved in a crystallization. But that’s why he’s in the business of building relationships. In this exclusive video interview, Darby discusses the value of those strong relationships with his capital partners.
With ever new technology, regulations, and land restrictions, more challenges will arise in securing a comfortable, sustainable relationship with capital partners. Like Darby, developers will need to find the right fit for the most value to sustain their business model.