Club Deals in The Real Estate Development Market

Investment in development brings a lot more profit than investment in ready-built property. If purchasing a share in the ready-made rental business earns $4-8% per annum, the profitability of the development projects is at $15-30% per annum on average.

To get a bank loan and start construction, a developer shall prove to the bank that it possesses funds equivalent to 25-40% of the total project cost. This is an absolute requirement of banks in order to provide such funding. Even a large and reliable developer is not always able to provide the required amount. To increase its own capital to the requested level, the developer is ready to attract "third-party" investments - this is when a possibility to invest in the developer project at an early stage emerges.

Unlike collective investment tools, which can have hundreds or even thousands of private investors, club deals are limited to 3-10 people, each of whom becomes a shareholder of a specially founded project company, which owns all the property rights and the future real estate. The flexibility of such shell companies enables both addressing such tasks as protection of investors' interests and minimizing tax burden during profit distribution.

We have direct access to developers from different countries and consequently a constant flow of projects. The partners of the company with over 60 years of total experience in personal development and investment in different countries evaluate the projects themselves. We analyze the projects the same way as the venture funds analyze startups in the Silicone Valley - we analyze the team of the developer, its experience in similar projects, the history of our successful cooperation with this developer, and even the developer's reasons to attract third-party investors. It the results are satisfactory we proceed to the in-depth inspection - we analyze the concept of the project, its business plan, financial model, construction cost estimation, and sales targets. At the final stage, we verify or create the legal structure of the deal, warranties, and taxes. You are the one who decides on investment, but each project available to our investors has already passed our verification and approval.

We mainly invest in the highly profitable sector, which is associated with some standard risks. 1) Risk of failure to obtain the required permits, licenses, and approvals. We select either the projects with already approved documentation as its approval is a prerequisite for participation in the deal; or projects implemented by developers with vast experience in approval of similar projects. 2) Risk of increase in the cost of construction or reduction in the sales revenue. We select projects with adequate margins to cover any realistic variances. We prefer to structure the deal in such a way that the profit is first paid to investors and then to the developer. 3) Risk of project delays. Reduction of profitability due to increased term of investment is a common practice for the development sector; which is why we carefully analyze all the schedules and charts and bring them to conservative scenarios. 4) Risk of improper management - to minimize this risk we scrutiny the team of the developer rather than the project itself. We prefer to work with the developers whom we already have a history of successful cooperation with.