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From sale of my template, both here and at TransCaptialPro, it seems to me that there is activity with smaller funds, say under $50MM. It could be that smaller funds will by nature be more local/regional, with non-institutional investors finding comfort in being able to visit their investments. I also wonder if there is a sense that starting with a clean sheet of paper, investors don’t have to worry about surprises in the portfolio.

Of course there is a huge financing gap with banks still licking their wounds from aggressive lending over the past several years. All equity deals, or low leverage deals can provide a great risk-adjusted return to investors. The key is to buy right and to use readily available access to capital as leverage to get the right deal.

Of course, if you need to raise an investment fund, we’ve got the Real Estate Investment Fund Private Placement Templates to get you started.

Banks today are less aggressive than they were 12 months ago. So when you are seeking financing to acquire a a piece of real estate, you may find that the equity required to complete the acquisition is more than you have. So as you set out to raise the money you need, your main concern may be that if your investor puts up the majority of the equity, you will end up ceding control to your investor.

So how do you structure your deal?

Consider giving your investor a preferred return. If you form a partnership to acquire the real estate, structure it so that the limited partner – your investor – gets a preferred return. Subject to what the investment objectives of your investor are, you have a lot of flexibility when it comes to structure. For example, if you require more cash flow to fund improvements or carrying costs until stabilized occupancy, you can structure the the partnership so that the preferred return accrues rather than paid in cash. Or, if you’ve structured a high preferred return to the investor, you can pay some of the dividend in cash and accrue the rest.

Keep more equity.

Structuring a preferred return for your limited partner means less dilution to you (meaning that you will give up less equity) for two primary reasons. First, is something called preference. Preference means that the limited partner will receive his money back before the general partner – they’re further up the pecking order when it comes to distributions. Preference is not just a concept that applies to the L.P./G.P. relationship; it also applies to debt financing. A senior bank loan has a preference over a mezzanine note. And, as a bank loan is cheaper than mezzanine, likewise, the limited partner’s capital will be cheaper than the general partner’s capital.

The second reason this structure should be less dilutive to you is due to the components of the return to the limited partner. The return to your limited partner has two components – dividends and equity kicker. The dividend is expressed as a percentage of the face amount (or principal) of the investment. You can make this dividend whatever you’d like – 8%, 12% or 18%. And, as mentioned above, the dividend can be structured as current pay or accrued. However, since money today is worth more than it is five years down the road, if you accrue the dividend, you will have to give up more equity to achieve the targeted return the investor is seeking. Note also that the dividend provides your limited partner with a preferred return, meaning that they get a return on their money before the general partner does.

The equity kicker is a claim to some percentage of the equity of the investment. The equity kicker is defined in the partnership agreement, or identified by virtue of the general partner’s carries interest. The equity kicker allows the limited partner to participate in the increased value of the real estate holding after receiving their preferred return.

So for example, say you determine that the return to the limited partner needs to be 25%. If your preferred return is 12%, then 13% of the return needs to come from the equity kicker. Based on your base-case projections and the structure of the transaction, the equity kicker may require 20% of the equity or it may require 60% of the equity. Each situation is different and requires that the deal get modeled to see how the returns behave.

So if you are seeking to raise capital, think through the preference issues of your limited partners and keep more of the equity for yourself.

To successfully raise the capital you need you will need to execute on several fronts, but that is not the subject of this article. In this article we’ll discuss the 7 quickest ways to kill your capital raising efforts.

1.    Talk to as few people as possible. Your deal is probably so attractive, why wouldn’t anyone jump at the chance to invest as soon as you show up. If you only need a few investors, it’ll probably be the first handful of people you talk to.

2.    Make sure you only talk to people who don’t have any money. Getting an audience with Uncle Lou is certainly easier than getting in front of Mr. Money Bags; besides, Uncle Lou is easy to talk to and he likes you. Forget that Uncle Lou doesn’t have any money. When Dillinger responded, “…because that’s where the money is” to the question of why he robs banks – he was just kidding.

3.    When you get around to talking to people, make sure you talk to one person at a time. Don’t make the mistake of chasing several prospective investors at once; it’ll just wear you out. Pick one prospective investor. Get an appointment set up. Wait until you meet with and hear back from them before you call the next prospective investor on your list. Besides, it would be embarrassing having to turn investors away just because you called too many people at once.

4.    Take your time. Whoever said, “time kills all deals” doesn’t know what they’re talking about. Take your time, there’s no hurry. Take your time calling prospective investors and take your time getting back to them (you don’t want to seem too anxious). Don’t press a sense of urgency when you talk about your deal, people don’t like to be pressured.

5.    Have a poor pitch. Make sure that your talking points are as uninteresting as possible – boring in fact. You don’t want to grab anyone’s attention. Don’t focus on the fundamentals of the opportunity at hand. Forget all that talk about supply/demand dynamics, perceived versus intrinsic value gap, competition, location, and downside protection – that’s all uninteresting stuff. Focus instead on you and just keep telling your prospective investor “I’m gonna make you rich!”

6.    Investors want to guess how much you need, so don’t tell them what or how much you’re looking for. Play 20 questions with them, everyone likes games, and it’s more fun that way. If your prospective investor asks you what the targeted return is, the right answer is always “what do you think?” When you answer a question with a question, it shows that you are a shrewd businessperson. If they push you, just tell them “whatever works for you”, you want to show that you’ll be accommodating.

7.    Be unprofessional. Show up late for meetings. Don’t look the part. Be unprepared. Steer every answer to “I’m gonna make you rich!” Don’t have any documents that describe your deal, like a term sheet or private placement memorandum, you don’t want to come across as too slick.

There you have it. Follow these seven simple steps and you too can have your capital raising efforts flame out as quickly as possible.