Small-scale development investments provide opportunities for less-capitalized real estate players to achieve business goals. But, such endeavors should be embarked upon with eyes wide open.
First, entrepreneurial developers must carefully consider if and how they will establish the nature of an investment partnership. While foregoing formal partnership documentation is often perceived to be a cost-saving mechanism – particularly when the partnership is founded on a close relationship – formal partnership structuring is in fact critical, due to the numerous unforeseen events that can unfold in the personal and business lives of involved parties. The short-term perspective on issues, diminished profits, or the potential for soured relationships surrounding the drafting of formal documentation will pale in comparison to issues that can arise down the road as a result of larger forces (like an economic downturn) or challenges closer to home.
In other words, don’t be penny wise, pound foolish. If you’re worried about offending your partner by asking for legal documentation, you have the wrong partner. After all, if you trust each other enough to not have it, then asking for it shouldn’t be an issue. And, if the concern is about extra costs, well, a project shouldn’t be so lean that upfront legal costs may make or break the profit potential.
Secondly, such smaller dollar ventures nonetheless entail multiple levels of complexities, time delays, and community controversy that belie the relatively small capital commitment. These twists and turns are not altogether uncommon, and, in fact, are not necessarily relative to project size. In reality, a project of much larger dollar value would face the same issues, but the actual dollars returned would be greater (if successful). From a business perspective, time is better spent when there is a bigger dollar payout.
Despite this, however, there is a legitimate desire among less well-capitalized investors to pursue an opportunity more easily within the grasp of limited capital resources. Only certain factors are realistically in the control of any investor, regardless of size, scope, or intent. Timing is everything. Even strong locations that are aligned with citywide planning and development goals, that have simple and straightforward capital structures, and that do not have large sums of money at risk, are subject to the whims and unpredictability of larger markets. Even small projects can suffer.
The need to balance the desire to build a track record with the reality that a small project yields small dollars, even if percentage returns or multiples are large, must be a calculated decision. Consider the time lost for pursuing, and potentially executing, other deals against the profit and experience-gained before committing. That is not to say small-scale deals are not worth the effort – many of them can be – but don’t get lost in assessing an opportunity on only percentage point or equity multiple measures.