Private equity, like private loans, can be expensive. But if it helps your clients get the deal done while still making an acceptable rate of return, then you've achieved your goal and theirs.

Consider this example: If your client's investment requires $100,000 of equity, but your client has only $10,000 in cash, then the additional $90,000 -- or 90 percent of the total equity -- is required. For that level of investment, some private-equity investors will require a rate of return of 90 percent of the monthly cash flow. Further, when the property is sold, they may want an additional 15 percent on their investment.

Thus, if the property generates $2,000 in monthly cash flow, the investor would receive $1,800 per month. When your client sells the property, the investor would get the initial investment back, plus 15 percent, to equal $103,500. This leaves $200 per month for your client, or $2,400 per year, a 24-percent cash-on-cash return for every year your client holds the investment.

Other investors may take less upfront, but they may want higher returns on the back end. That would give your client more of the monthly cash flow and a higher return, but the back end benefits the investor -- so much so that your client might not receive any money upon the property sale. In that case, your client is in it only for the cash flow.

Presenting the opportunity

Find your client's rate of return by analyzing the property's cash flow, adjusting for variables. Your clients use this to present to potential equity investors. Clients will highlight the investment's profit-generating potential and the equity investor's potential profit.

Advise your clients to present the investment in the best light, including:

• Giving investors an upfront overview in a few sentences so they know what to expect from the presentation. Does the project offer above-average returns? Can they get special financing? Are they picking it up at a discount?
• Putting the project in context from a macro level, geographically and conceptually. Present an area map and a site map upfront.
• Having a complete financial analysis that shows all costs, value creation and the potential for the investor's return on equity. Your clients should explain their exit strategy thoroughly and also address the risks and their plan for mitigating those risks.
• Incorporating all team members; and
• Leaving time for questions.

The better the presentation, the more likely your clients will receive the equity.

In addition, when your clients accept money, make sure they and the investors are acting lawfully. An attorney can advise them on securities regulations that may come into play.

Many commercial property-buyers pass up deals for which they think they can't immediately find financing. Doing so may cause them to miss potentially profitable deals. By helping clients find private-equity partners, you can help make sure they don't make the same mistake.

As their broker, if you also can educate your clients and help them find private-equity sources, you can collect fees on the equity raised in addition to the fees associated with the bank loan.

Craig Grella, co-founder of Cornerstone Funding Services Inc. -- a full-service real estate consultancy with offices in Long Island, N.Y., and Seattle -- started his career as a civil and structural engineer. Working with developers made him aware of the challenges of commercial and development financing. As such, he transitioned from designing projects to financing them and worked as a senior loan officer with several national banks. Contact him at (800) 928-0845 or visit www.cornerstonesvs.com.

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