Developers, are you fed up with the current difficulties in securing developer and consumer financing?  Take comfort. Financing can be obtained.  This Article sets forth a program of ten points to address to be successful in raising capital.

1. Recognize Your Negotiating Leverage.

Bankers, like most of us, are salespersons. It just happens that their product is something we, as developers, all need—money.

However, bankers also have a need; they need to put their capital to work. Even in today's economy, there is more capital available than there are sound deals, properly planned and with the team and program to execute the plan.

Accordingly, I recommend that your proposal and negotiating strategy reflect your sense of confidence. This will inevitably increase your ability to raise your financing and do so on more favorable terms.

2. Familiarize Your Banker with the Fractional Real Estate Ownership Market

Many of bankers do not understand the fractional real estate market and the opportunities it presents. Therefore, your first step is to educate your capital source.

A.       Benefits for Vacation Home Buyers: The Irresistible Logic of the Fractional Value    Proposition.

For buyers, the Fractional Value Proposition is: Fractional vacation home ownership offers better value than whole ownership. This Proposition has the following elements:

• For people using their vacation home just a fraction of the year, it takes good financial sense to pay just a fraction of the acquisition costs and upkeep.
• Fractional ownership provides a high level of vacation services and long distance property management. Therefore, fractional ownership provides more than simply the sticks and bricks of real estate; it provides a personalized vacation experience.
• The lower price point of fractional ownership can facilitate all-cash or part-cash purchases. It can enable buyers to qualify for a mortgage or home equity loan. It can make possible a luxury vacation home purchase that would otherwise be inadvisable or unaffordable. And, for the privileged few, it can facilitate purchase of several vacation homes in different locales.

B. Benefits for Developers and Investors

For developers and investors, fractional real estate can generate sales that might otherwise not be made in the current climate because of the high price point and lack of logic in whole ownership and the desire of today's buyers for vacation experiences beyond simply owning real estate.

Lower price points of fractionals can attract a broader and deeper pool of income-eligible buyers. This can result in a higher sales velocity with an experienced and pro-active marketing and sales team in place.

A word about what has been referred to as the "Fractional Multiplier" is appropriate. Prior to the current economic climate, general industry experience was that a whole ownership property sold fractional could generate significantly greater revenues than a whole ownership sale—as much as 1.5 to 2 times whole ownership revenues. This ratio is the "Fractional Multiplier". To put it colloquially, a pizza sold in slices sells for more than that same pizza sole whole.

In the current climate, the Author recommends that fractionals be viewed as another and more effective way to sell rather than simply a way to sell products for more.

Having said that, there still can be a premium from the aggregate fractional sales, though not realistically at the same 1.5 to 2 times level.

C.        Advantages of Fractional Ownership over Whole Ownership

As your capital source may be more familiar with whole ownership, you should describe the advantages of fractional ownership. From the perspective of the buyer, these include:

a.        More rational investment.

b.        Buy only the amount of vacation use time actually needed.

c.        Buy a property fitting the amount of discretionary funds available.

d.        Less funds committed to one location.

e.         Fractionals facilitate multiple purchases.

f.         Lower carrying and maintenance expenses.

g.        Higher quality home at less cost.

h.        Less dependence on unreliable rental programs.

i.         More of a true lifestyle property providing an exemplary vacation experience, rather than simply owning bricks and sticks.

j.          Effortless vacationing free of property management responsibilities.

k.        Concierge to plan vacation activities.

l.         Generally more extensive services and amenities.

From the developer's perspective, these include:

a.        More saleable product in the current economic climate.

b.        Broader and deeper market.

c.         Higher profit potentials.

d.        Higher occupancy rates.

e.        Nice complements for cross-selling in a mixed use development.

D.        Distinguish Fractional Ownership From "Time Share"

Many people confuse fractional ownership with traditional "timeshares". While both are generally treated similarly under governing law, they are markedly different and the differences should be described to your capital source.

From the perspective of a developer, these advantages include:

a.        Higher selling prices and more profitability.

b.        Better public image.

c.        Higher consumer satisfaction.

d.        More targeted, less expensive marketing and sales processes.

e.         Target buyer universe is more well-defined.

f.         Marketing and sales techniques are low-key and relationship oriented.

g.        Target market of buyers is more affluent.

From the perspective of the buyer, these advantages include:

a.      More of the purchase price reflects product costs and therefore, fractionals offer higher quality and better value.

b.      Appreciation potential--fractionals generally behave like whole ownership real estate in the particular market. When whole ownership appreciates, so does fractional real estate. On the other hand, timeshares invariably depreciate.

c.      Fractionals reflect a more exclusive experience--a lifestyle, in contrast to simply owning an interest in a condominium.

d.        External fractional exchange networks are generally more exclusive.

3.         The Financing Details

A.        Size of Your Financing Proposal

This Article is directed to institutional financing primarily. Each financing institution will have its own radar screen threshold defining a minimum deal size sufficient to get its attention. A good general criterion for developer financing is at least $25M U.S. A good rule of thumb for consumer financing is a projected loan volume of at least $50M U.S. over a 2-year period.

Larger deals are generally preferred. However, you must demonstrate the business and marketing plans, financial strength and experienced team to handle the larger deals.

Smaller deals should not be ruled out. Funding would be based upon the strength of the deals, the accomplishments achieved by the developer prior to the institutional funding, the expertise and track record of the development team and the likelihood of additional deals from the same developer.

B.        Recommended Return on Development Equity

A projected return on development equity of at least a 25% IRR is advisable. This can be subject to deal-specific considerations such as the trade off between overall return and timing of return; and the institution's goals for each.

C.        Profit Splits and the "Waterfall" of Distribution

The capital source will receive the larger return. Splits will depend on items such as the ratio of developer investment to that of the capital source; the project's sales performance and budget relative to projections; and your capital source's investment criteria.

The "waterfall" of distributions is the sequencing of distributions to the capital source and the developer. There are various bases upon which the waterfall may be determined, including 100% to the institution until repayment of capital; distributions reflecting the ratio of developer investment to institutional investment; the overall profit potential for the institution; and the institution's evaluation of project strengths and risks.

D.        Timing of Return Of, and On, Equity

A good general rule for a return of equity is 2- 3 years from investment. A good general rule for return on equity is 3 - 5 years from investment.

E.        Competition for the Investment Dollar

Many financing sources today are focusing on "buying distress"--secondary properties in secondary areas that are deeply discounted and the hope/expectation of the eventual economic turnaround. This is obviously not the profile for fractional resort properties.

Yet, the demonstrable fact is that buying luxury properties favorably (though not "distressed") plus the Fractional Multiplier can produce comparable or greater profits with more speed and security than "buying distress". I recommend that you show this fact with mathematical models.

F.         Return on Institutional Debt, If Applicable

This will be determined by reference to the base rate in your market area plus additional points or a percentage interest in profit to represent the perception of increased risk.

G.        Document the Assumptions for All Material Items in Your Project Pro Forma

It is essential to show the bases for your projections. Absent this showing, your projections are simply numbers on a piece of paper and will quickly be relegated to the circular file.

And remember Murphy's Law says, "If something may go wrong, it will." It is, therefore, essential to anticipate all problems that may arise and show how you have planned to deal with them.

4.         Additional Items

A.        "Growth" Vs. "Seed" Capital/Showing and Operating Income Stream

As of a few months ago, the Author was finding a strong institutional focus on "growth" vs. "seed" capital and on the demonstration of a "proven" operating income stream.

Most recently, this focus has sharply diminished, to the point where a particular financing proposal for a new company which was not acceptable as of a few months ago is now highly desirable. This underscores the point made earlier that there is more capital seeking good deals and vice versa.

Having said that, we should note the following. Criteria distinguishing "growth" vs. "seed" capital include the amount of developer investment; how much additional capital may be needed to satisfy the institution's definition of "growth" capital; your accomplishment of necessary project benchmarks prior to institutional investment; and whether the project team has previously worked together or is newly constituted.

As to a "proven" income stream, if you encounter this requirement, one way to address it, in the context of acquiring and fractionalizing existing real estate is to consider releasing only small portions of the fractional inventory for sale at any one time and holding the remaining inventory for rental purposes. This strategy, which releases inventory for sale gradually, offers these additional benefits:

Developer-owned units may be used for "Try and Buy" marketing sales programs and for hosting the press.

Limiting the amount of inventory available at any one time sends an "urgency" message to potential buyers.

The developer may take advantage of appreciation as the economy recovers.

B.        Acquiring and Fractionalizing Existing Inventory Vs. New Construction

Many institutions will favor buying and fractionalizing existing properties rather than ground-up construction given the abundance of properties that can be acquired favorably; the security provided by existing properties during project sell out; and the risks of construction.

Moreover, new construction is more difficult to sell to the consumer than existing properties. In today's still fragile economy, wary buyers prefer something they can see, touch and feel rather than the promise of a future "dream" vacation home.

An important caveat is to select only properties with solid real estate fundamentals. The availability of the property should be attributable to general economic conditions rather than deficiencies in the property or the project itself. Fractionalizing is not a "magic bullet" for properties lacking in sound fundamentals.

It is possible to finance new construction. However, the criteria for funding will be more stringent and the cost of the funding will be higher.

C.        The Owner Usage System

Usage patterns will vary from area to area in terms of annual use, seasonality of use, ability to make last minute reservations and other such items. Accordingly, you should study and document in your presentation the owner usage patterns in your particular area and not simply incorporate a system that may have been applied elsewhere.

5.         Marketing and Sales

You may have the best project on paper. But if you cannot market and sell it, you will go nowhere. You need to show your programs to make marketing and selling successful. From the marketing perspective, these programs should include:

a.        Relationship marketing techniques.

b.        Awareness of the evolving definition of luxury in the buying public.

c.        Identifying your target market and how to access it.

d.        Showing the depth of your target market.

e.         Crafting a compelling marketing message that will resonate.

f.      Crafting a compelling web site and one which will rank higher on search engine results.

g.      Referral programs--to your owner networks and the networks of your marketing and sales team.

h.        Public relations and strategic alliances.

Sales program should include:

a.        Techniques of relationship selling.

b.        Techniques to stimulate buyer urgency.

c.        Awareness of common sales agent mistakes and how to fix them.

d.      Keys to relationship sales success such as empathic listening, training agents for dialogues rather than monologues and, the steps in a relationship sales appointment.

e.    Closing "scripts". You should prepare your sales team to anticipate questions which inevitably arise in the sales process and train them in "scripts" that have proven successful in dealing with these questions.

6.         Your Development Team

You may have a superb business plan and marketing and sales programs. Yet you still must execute the program in the real, practical, and intense world of development. Therefore, you need to create an experienced, creative, detail-minded and cohesive team and describe this team in your financing presentation.

7.         Negotiating the Deal

Here it is important to differentiate between the words "principal" and "principle". You will undoubtedly receive a number of requests for detailed information and analyses. If compliance with the requests will not cost you material additional costs (i.e. "principal") don't fight over issues of "principle". Provide the information and don't waste time and goodwill in fighting the requests.

8.         Reporting to Your Capital Source

You should describe the detailed program for ongoing communication to your capital source. This communication should periodic actual versus projected comparisons of the major line items in your projections and, where actual results are less positive than projected, a description of the steps that you will take to meet the real world challenges.

9.         Consumer Financing

The following additional items should be addressed.

A. Developer Guarantee of Delinquent Loan

A request for this can take two forms. The first is to define a delinquent note as 60 days overdue, with the developer having another 30 days to generate a sale of the fractional interest before the guarantee is called upon. The second, less appealing, is recourse to the developer for a defined period of 1 to 2 years. I recommend that you not resist these requests because (a.) they are almost always presented; and (b) by definition, you will be selling to qualified buyers and hence the exposure is not highly significant.

B.   A "Holdback" Reserve

You should also anticipate a request that you establish a "holdback" reserve; namely an escrow fund of 3% to 5% of each sale for a period to be determined, generally 1 to 2 years. Here, the Author would recommend resisting this request as the alternative under "A" above should suffice.

C.   The Homeowners' Budget

You must present the homeowners' budget to ensure that the property will be maintained and operated in a manner to preserve its market value. This mitigates the risk of the lender and protects against owner dissatisfaction that can lead to mortgage default.

D.   Lender Remedies on Default

You should show that the lender has the same remedies on default by an individual fractional owner as it would have with full ownership. This should include a description showing the lender that its right to foreclose on a defaulting borrower will not be prevented or impaired because there are other co-owner's of the residential unit.

E.   Past Performance of Fractional Mortgage Funding

You should document the excellent past performance of fractional mortgage funding and show that the current lack of such funding results from general economic conditions unrelated to the quality of these mortgages.

10.       The Bottom Line

The bottom line is that fractional financing is available. You will maximize your chances of securing your financing if you craft your financial presentation to address the items described above.