Monday, October 07, 2024
Brett Chotkevys
When you’re embarking on an assisted living investment, whether it’s purchasing land or building new construction, securing financing is crucial. But what do you do when the bank won't cover 100% of the project costs? This is where raising equity comes in.
In this post, we'll dive into raising capital on the equity side—a strategy that can make your project a reality by bringing on partners who share in both the risks and rewards of the deal. I’ll walk you through how I raised money for my current memory care project and share tips for structuring your own deals.
The Basics: What Is Equity Financing?
Equity financing involves bringing on a partner who will invest money in your project in exchange for ownership. Unlike debt financing, where you borrow money and repay it with interest, an equity partner gets a percentage of the project’s profits and ownership in the business. This is often a preferred method for larger projects because it reduces your personal financial burden while still getting the capital needed to move forward.
For example, in my latest project—a memory care neighborhood of four mansions, each 10,000 square feet with 16 bedrooms and 17 bathrooms—I secured a bank loan for the majority of the $10 million cost. However, I still needed funds for the down payment, and that’s where my equity partner came in.
Why Raise Money Through Equity?
There are several compelling reasons to consider equity financing for your assisted living project:
Down Payment Assistance: When a bank offers to lend 80-90% of the total project cost, you still need to come up with the remaining 10-20% as a down payment. This can be a significant sum, especially for large-scale projects. Unlike debt, where you might be tempted to borrow more money, equity financing allows you to bring in a partner who provides the cash you need—without taking on additional loans.
Better for Larger Deals: Raising smaller sums of money (e.g., $50,000) can often be accomplished through debt financing, such as loans from friends or family. But when you’re looking to raise hundreds of thousands or even millions, equity financing becomes a more realistic and appealing option. For my memory care project, I raised over $1 million on the equity side.
Appealing to Investors: Equity partners want to be part of a winning deal. They are not just lending money—they are co-owners. This can be a great selling point when you're pitching your project. For instance, my investors knew they were getting involved in a project with long-term returns, thanks to the high demand for memory care services and the potential for appreciation in real estate.
Structuring Your Equity Deal: Key Considerations
When raising money through equity, there are a few key things to consider to ensure both you and your partner feel secure in the deal.
Define Roles Clearly: In an equity deal, you’ll typically have one active partner—usually you, the person running the business—and one or more passive partners providing the funds. It’s crucial to set these roles early to avoid complications later. I prefer to keep my investor partners as silent partners, focusing on the capital side while I handle day-to-day operations, licensing, and management.
Personal Guarantee: When you obtain a traditional loan, the bank will require a personal guarantee, meaning they can go after your personal assets if the deal falls through. Your equity partner might also be required to provide a personal guarantee if they own 20% or more of the project. In my deals, I try to structure the equity partner's share below 20% to avoid this, unless they are comfortable with the added risk.
Risk vs. Reward: The percentage of ownership you offer your equity partner should be aligned with the amount of risk they are taking. If they are putting up a substantial amount of money and providing a personal guarantee, they’ll likely expect a larger ownership stake. If you can keep them below 20% ownership, that limits their risk while still allowing you to raise the funds you need.
When to Bring on an Equity Partner
Timing is everything when raising equity. The best time to start conversations with potential investors is before you've locked in a property. This allows you to present your business plan and proforma, outline costs, and discuss potential returns early on. In my case, I had these preliminary discussions before finalizing the land purchase, allowing my equity partner to be involved in the decision-making process.
Final Thoughts
Raising equity is an excellent strategy for securing the capital needed for your assisted living project, particularly for larger deals that require significant investment. By bringing on an equity partner, you can share the financial burden while still maintaining control over the project. Remember to structure your deal carefully, ensuring both you and your partner have clear roles and an understanding of the risks and rewards involved.