Diversify: Minimize Risk & Optimize Return on Both Sides of the Fence
Equity, in the instance of private funding vehicles, is distinct from traditional loans. Financing is provided by investors, who have an “equity” share- i.e., a “piece” of ownership – in the commercial enterprise. “Sort of” similar to (but much different from a legal and regulatory standpoint!) stockholders in publicly-traded companies, they “own” a slice of the pie, though usually their role is a passive one. The size of the pie may change during the various stages of the project – due to financial performance, market value or revised projections. Their “shares” may have specified redemption dates or may be sold to third parties at any time prior.
Individual, specific, structures will vary, but Capella Mortgage will thoroughly explain, coordinate and match the optimal relationships among all qualified parties throughout the process. Unlike traditional loans, the lenders’ exposure is limited to only that portion of the total package that was invested, while returns are not capped by fixed interest rates. Unlike traditional loans, developers and contractors can expect to share a higher percentage of any profit with their “partner-co-owners”, in return for the others’ sharing of the risk.
Economics 101: “The greater the risk, the greater the potential gain.”
Economics 102: “There’s no such thing as a free lunch.” Life is defined by trade-offs and, ultimately, is a zero-sum game.
From the investor’s standpoint, the advantages of a diversified portfolio is axiomatic, ‘only makes dollars and sense’. For a borrower, in a worst-case scenario, the opportunity for future projects – his or her own personal or ongoing business finances – can be protected.
In many ways, the concept of “equity pieces” validates the essence of capitalism. Not only can the shares themselves be traded, but they also represent potential ROI. For example, the Developer is seeking 75% financing. Funding is available among 2 (or 4 or 100) investors in varying amounts. Possibly some of those investors have partitioned their interests into multiple “blocks”. Now, the free market kicks in – throughout the life of the project, or beyond.
Investors, 3rd parties among the general public – even developers themselves – can buy, sell or trade their interests, based on supply, demand or their own judgment to enhance profits and ROI’s.
Conceivably, interests can be shared, traded or held for continuing, residual income. All parties, on both sides of the fence, have the opportunity to negotiate the parameters of the original agreement. As well, there is the added potential benefit, to all parties, of flexibility in managing resources and financial strategies.
If this “skinny” appears to be “overweight” or confusing, Capella Mortgage is well-equipped and eager to help with more explanation.