Lenders want borrowers to have skin in the game. Loan applications where a sponsor is under-capitalized or inadequately capitalized can cause a deal to unravel. Most deals are syndicated through a group of equity partners or one or two large institutional partners. Situations where a sponsor doesn’t have those equity partners lined up properly—with good autonomous control over a project—can also present a hurdle. Borrowers that have good access to equity capital, and can control it, are much more successful in doing deals and are less likely to have a slip as they move forward, notes Falese.

Lenders are wary of new entrants that are paying top of the market pricing and do not have realistic market expectations or a good understanding of market cycles. “We recently encountered this dynamic in Jacksonville and Atlanta, where the sponsors appeared to have a good background and experience, but when we dug in they had not done their homework to understand the local market fundamentals and competitive properties,” says Prosser.

Oftentimes, lenders receive requests for term sheets from brokers who are not engaged by a borrower to represent them. “After spending the time to underwrite, qualify and termsheet a deal we find out that the sponsor had other options and/or his relationship with his broker was weak and they go another direction,” says Prosser. Lenders are also wary of scenarios where a sponsor is shopping for a loan even though they don’t have a deal under contract. Many lenders don’t want to waste time on a deal where the buyer is in the early stages of assessing access and cost of capital and may not even move forward with a project.

HNW investors frequently fall for the sales pitch about a potential investment, but then give little to no thought to what underlies the deal, says Les Kiser, principal and managing broker at Chicago-based multifamily brokerage firm Kiser Group Realty Inc.

“It’s easy to get swept up in the excitement, but just like with any investment, you have to do your due diligence,” Kiser notes. “Make sure everything checks out. I know of too many examples of people losing money because they bought the pitch without doing the research.”

Components of due diligence should include:

·         Seeking references from other HNW investors who’ve done deals with the firm that’s making the pitch, as well as requesting case studies for previous projects to help determine how the firm executes deals, how it delivers results and what its investment philosophy is. It should be an “immediate red flag” if the firm refuses to offer this information, says Charles “Chick” Atkins, principal at Atkins Cos., a real estate developer and manager in West Orange, N.J.

·         Carefully examining the positives and negatives of an asset. For instance, what are the market comps, how desirable is the location of the property and how has it performed in the past?

·         Understanding the risks. This is particularly true when placing money with—and trusting in—a friend or relative in conjunction with a “can’t miss” opportunity, says Randy Hubschmidt, managing partner at Fortis Wealth. “More often than not, high-net-worth people tend to learn the hard way that they would have been better off to have had their money professional managed, and with much better liquidity and flexibility,” he notes.

The bottom line: Know who you’re doing business with.

“A good partner can make a bad deal work, while a bad partner can kill a good deal,” says Sica.

Understanding environmental issues is always a hot button. Are they discovered? Are they understood? Is there a solution or something in place to deal with those issues, and is the lender comfortable with that risk?

Lenders don’t like surprises. They look for structural issues, such as a costly roof repair or replacement. If those capital expenditures do exist, lenders want to make sure the borrower has enough money to deal with those issues.