What to Do When Your Investors Aren’t Coming Through

As a general partner (GP) in commercial real estate, you’ve probably encountered this scenario: You’ve raised half the equity for your deal, but you’re struggling to get the rest of the funds committed. Maybe investors are wary of the current economic climate, or perhaps they’re taking a “wait-and-see” approach. If you’re finding it hard to secure the remaining dollars, you’re not alone. Many GPs face similar real estate capital stack challenges, especially in volatile times. Here are some strategies to consider when you’re unable to get investors to commit to the deal.

1. Broaden Your Search

If your current network of accredited investors isn’t coming through, it may be time to look beyond the traditional sources of capital. One potential avenue is to tap into unaccredited investors who can still play a key role in funding your deal. The challenge with unaccredited investors is ensuring that they meet the legal requirements to invest in certain types of deals. This is where Covercy’s platform can help. By using Covercy, you can easily manage and onboard unaccredited investors while guiding them through the accreditation process. Covercy streamlines the complex steps required to get them accredited, opening up a wider pool of potential capital for your project. This allows you to cast a broader net without the administrative burden, helping you close your deal more efficiently.

2. Lower Minimum Investment Amounts

One way to increase interest is by lowering the minimum investment threshold. This tactic allows you to tap into a broader pool of potential investors. Many GPs find that offering lower minimums for the first wave of investments—especially if they frame it as a “test” or “probationary” investment—can help attract the capital needed to close the deal. While this may result in more administrative work, it can be a necessary step to get the deal over the line and build trust among new investors.

3. Adjust Your Underwriting Assumptions

If you’re looking to attract investors who are more conservative in today’s market, make sure your underwriting assumptions are extremely conservative. Demonstrating that you’ve taken a cautious approach in your projections will give potential investors more confidence in the deal, especially if they are worried about economic uncertainty. Strong, conservative underwriting helps mitigate risk for both you and your investors, ensuring they feel comfortable with the numbers you’re presenting.

4. Consider Non-Traditional Sources of Capital

If you’re still short on equity, it may be time to explore non-traditional sources of funding. Some investors are willing to place capital in areas outside the usual institutional channels, including private equity firms, family offices, or even smaller syndication groups. In some cases, private country clubs or local investment groups may be open to funding projects that align with their goals, but only if you can demonstrate the stability and potential of the project. These sources can be a great way to fill gaps quickly.

5. Offer Attractive Terms to New Investors

If you’re facing a slow market, consider offering more attractive terms to new investors. Whether it’s a higher preferred return or a larger equity share, sweetening the deal can be the incentive some investors need to pull the trigger. This strategy requires careful consideration of how much additional equity or return you can afford to offer without eroding the financial viability of the deal. Offering appealing terms can help close the gap and bring in the funds necessary to finish the deal.

6. Leverage Your Existing Investor Relationships

Instead of just focusing on finding new investors, consider going back to your existing network with a fresh pitch. Often, your previous investors might be more willing to invest again, especially if they’ve seen success with you in the past. Offering incentives like first rights of refusal on future deals or exclusive access to high-value opportunities can help reinforce their commitment. Leveraging these relationships can often be a faster route to closing the deal than attracting entirely new investors.

7. Be Transparent About Market Risks and Opportunities

In a time of uncertainty, transparency is key. Be honest with your investors about the risks involved, but also highlight the opportunities. For example, some sectors like storage and multifamily have shown resilience during previous recessions, while other markets may offer more potential due to demographic shifts or regional growth. Educating your investors on these dynamics can help them feel more secure in their decision, ensuring that they’re aware of the balance between risks and rewards.

8. Consider Short-Term Preferred Equity

If you’re still short on equity and traditional investors aren’t stepping up, short-term preferred equity could be an excellent option. This form of financing, often used to fill the gap in a capital stack, can offer a flexible solution for GPs needing to close the deal. Preferred equity investors receive a fixed return, sitting between debt and equity, but they have priority over common equity holders in receiving returns. The structure is flexible and often shorter-term (1-3 years), making it a viable option for bridging the gap and securing the necessary capital to close the deal without long-term commitments. It can also preserve more of the upside for your core equity investors, giving you a competitive edge in negotiations.

Conclusion

Facing a gap in equity for your commercial real estate deal is a tough challenge, but not an insurmountable one. By broadening your search for capital, adjusting your terms, and leaning on creative real estate capital stack strategies like short-term preferred equity, you can overcome the hurdle and finish what you started. With the right approach, you can ensure that your deal gets the funding it needs to succeed, even in challenging times.

At Covercy, we can help you manage your capital stack, streamline investor communications, and ensure compliance by handling investor accreditation and capital calls. Our platform is designed to simplify the process, so you can focus on the deal while we manage the administrative load.

Let Covercy help you close your next deal efficiently and effectively. Talk to our sales team today.