their needs. They can also work directly with decision-makers, allowing them to access capital or get an answer faster. If your operator has strong relationships with several lenders, they are much more likely to secure
point the infusion of capital can pave the way for further deals. This year, Spartan launched income, growth, and debt funds for this reason. The pooled capital that funds provide can allow operators to secure good debt when possi - ble—and pivot to all-cash deals when it is not. For limited partners, the benefits don’t end there. Warren Buffett famously bet on index funds over stock pickers, and the logic here is much the same. Rather than funneling capital into a single syndication, investing in a fund allows you to spread out risk and achieve maximum exposure. Cash is also a helpful lever for securing debt. Many real estate operators are prone to overlever - aging—carrying too much debt com - pared to their cash flow and equity. This makes banks nervous. With more capital in hand, operators can obtain lower-leverage debt, making them a safer prospect for lenders. UNDERSTANDING YOUR OPERATOR The parameters of borrowing for commercial real estate have shifted. As a passive investor, you have
limited influence over how your operator responds to this. As such, information is your biggest asset. Before committing to an investment, it is important to take the time to understand your operator’s strategy and risk appetite. How are they positioned to operate in the contemporary lending environment? What, if anything, would trigger a capital call or distribution pause? Who is your operator borrowing from, and how are their loans structured? In the coming months, lenders will continue to be highly selective when financing commercial real estate deals—and that’s why it pays to select an operator with the connections and capital to navigate the market. Even in the current no-loan landscape, the right investment partner can help you reduce risk, fortify your portfolio, and come out ahead. •
advantageous financing, even when the market is crowded.
As a limited partner, you should also consider the types of loans your operator favors. As the lending pool shrinks, it is vital that your operator takes the appropriate steps to mitigate risk in their financing. Fixed-rate debt offers certainty and predictability, because the interest rate and payments are consistent throughout the term. Variable-rate debt, on the other hand, is subject to interest rate fluctuations, which can be unpredictable and impact cash flow. SPREADING OUT RISK, INCREASING EXPOSURE As loans become increasingly competitive, the perks of buying in cash are higher than ever. Operators who purchase assets in all cash can plan to refinance once rates are down, at which
Thomas Eddy is vice president of Capital Markets for Colorado-based Spartan Investment Group, a privately held real estate investment firm specializing in
the self-storage industry. To connect with Eddy directly, email thomas@spartan-investors.com.
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