Who’s in Your Corner?
Whether you’re in a boxing match or investing in real estate, it’s good to know you have someone in your corner to count on. When investing in real estate value-add or development deals, that someone is your owner representative, and it’s his or her job to keep your best interests in mind.
When real estate deals are financed through lenders, those lenders will demand someone in their corner, too: the bank’s or lender’s inspector.
So, what are the key differences between bank inspectors and equity representatives?
Backward and Forward
Bank inspectors mainly look backward on work that’s already completed. After all, their main concern is usually ensuring that monies previously paid and requested to be paid out by the lending institution will be used to fund work completed in accordance with signed contracts. They don’t want their clients to get too far “ahead of their skis” in the event that a contractor stumbles, and work needs to be supplemented or replaced by another vendor to finish the job.
Competent equity representatives not only keep track of what has been done to date but look proactively forward to what lies ahead: from next month all the way through to achieving the end goals. They foresee and advise on potential pitfalls in sequencing, resources, decisions and approvals. This ensures not only that investors’ money is well-spent, but that the project will be completed on time and with the expected quality.
Limited Versus Extended Liability
Another clear distinction in these roles involves liability. By definition, banks are essentially only at risk for the amount of debt (loan) made. And they need to avoid lender liability that may arise from asking a borrower to change what they are doing. Therefore, bank inspectors will not offer advice on design or construction of a project — instead, they will keep their focus on whether the work is done and due to be paid.
In contrast, equity investors can be at risk for an unlimited amount to complete the project and any liability that may arise. This includes the money already invested, the quality of the outcome and the value of the project once construction is completed. So, equity representatives must support their clients on a multitude of factors during the discovery, purchase, design, construction and close-out phases. Such guidance can include making design decisions, selecting contractors, establishing schedules, managing budgets and influencing the what, when and who of making a project successful.
As a side note, building inspectors employed by local municipalities play a role in construction projects as well. Their job is to ensure any work done follows applicable codes. These inspectors have the ability to stop progress on a job if they notice code infringements. It’s a situation no real estate investor wants to experience, and another reason why having good oversight — like that provided by Real Projectives® — is critical.
Intensity of Relationship
Given their more limited involvement, bank inspectors are often only paid to be transaction reviewers for part of the duration of a project. In fact, they may not even visit a site until bank financing kicks in (equity funded first), which is usually well past the design phase and can be several months after construction begins.
Equity representatives take a longer view on real estate enhancement projects. They frequently are involved during design, and sometimes even during acquisition of land and concept stages, and no later than when construction begins. The relationship with owners and investors is one of high trust and confidence extending beyond one project to many others.
Do you have questions about support teams for real estate investor representation? For more information on the range of services Real Projectives® offers clients, browse some of our other articles — or give us a call at 888.357.7342.