Welcome to The Real Estate Venturist. Every other week, this newsletter will give you a behind-the-scenes look at what it’s like to be a real estate entrepreneur. As always, this is not investment advice and merely my opinion.

To control or not to control…

I’m jealous of the firms who have a captive family office investor. One that quickly makes investment decisions, funds all or a significant portion of a deal, is pleasant to work with, and provides fair terms. They exist. Unfortunately, we don’t have one.

We’ve never partnered with a large institutional investor, though we worked for one prior to forming Calvera. On our own, we’ve raised roughly $90 million—an impressive feat given our high-net-worth base and lack of true anchor investor. As a result, we’ve shaped the outcome of our deals ourselves. We’ve never had someone in our ear forcing us to sell or take on financing that makes us uncomfortable. We’ve had full control.

But that control has come at a price: growth. Our portfolio size is limited by the capacity of our investor base. If, instead, we use our fundraising aptitude as GP (general partner) capital, we could multiply our buying power ten-fold.

For example, if we raise $10 million ourselves, we can acquire a property worth $40 million with a 75% LTV loan. However, if that $10 million is used as a 10% GP investment combined with an institutional partner for 90% ($90 million), we’d have $100 million to spend. That equates to $400 million in property with the same 75% LTV loan.

Managing a $400 million portfolio versus a $40 million single-asset acquisition is a different beast.

Bigger isn’t always better

Having more assets isn’t necessarily a panacea. Look at groups like Tides or GVA, who raised hundreds of millions of dollars by partnering with feeder funds and institutions. When you raise that kind of money, you have to spend it. And they did just that—at the top of the market. Today, many of those properties are distressed and have been foreclosed on. Even the principals are being sued by their lenders over personal guarantees. They grew quickly and significantly, but the cost was too great.

We’re looking for balance. A way to leverage our existing investor base and partner with a like-minded large investor to target a specific business plan. A plan that would be difficult for us to tackle on our own. At the same time, we want to be methodical about making acquisitions. Not blindly buying properties to quickly allocate a large amount of capital. Unless you get lucky, that’s not usually a great investment strategy. Yet showing a pipeline of future deals is a question that every partner asks.

Finding the right partner

An oft used business phrase is, “let’s date before getting married.” I tend to agree that it’s best to work together on one deal before committing to more. Both sides need to know how the other communicates, evaluates potential investments, problem solves, and treats one another. This is why the dating process takes so long, and why it’s hard to get a second date with that first partner.

While we may think we have the greatest deal ever, we’re still asking a partner to invest more than us and our investors combined. That investor—as do all investors—has the right to fully vet the investment and us as sponsors. Depending on the complexity of the investment, their internal process may take longer than we can bear. However unfortunate, it’s part of the dating ritual.

Short of finding a partner whose main decision-maker operates more from the gut than a spreadsheet, we have to accept that this process will take time. Here are a couple of ways to speed it up:

• Offer Different Economics.

  Rather than proposing a traditional common equity position, consider a mezzanine loan or preferred equity structure. Not ideal, but it can make an investment more palatable for the investor, and still give both sides an opportunity to test the relationship.

• Prove the Business Plan First.

  Start with smaller deals, prove that the approach works, and use those results to secure a larger partner for the next opportunity. Have them underwrite the bigger opportunity before they evaluate the next deal.

Something has to give—deal terms or a longer wait. We’ve waited this long. What’s a few more months?