Updated: Jan 28, 2021
Two KPI to present this deal: 78.4% Profit on Costs with a 73% equity stake of the sponsor, no debt and the remaining sources asked to the investors as crowdfunders.
On paper one of the best ever deal in terms of goodness of the real estate operation.
But what's in store for the crowdfunders: the sponsor is raising a minimum of 1.5 mln until 3mln , with an estimated ROI of 17.25% on a 18 months timeframe (IRR=11,5%).
Is it too good to be true?
Well let's analyze the capital structure: basically the crowdfunders invest in a preferred equity stake, with a liquidity preference compared to the equity sponsor (so senior to that) but with a profit share of 8.54% for a real capital stake of 27.3% (this for a 1.5mln round). There's no minimum interest guaranteed and this money, raised by a SPV with a capital hike and a large premium, goes to fund the mother company of the constructor.
So there's a risk to be involved in the credit profile of the constructor and not only of this deal. However the platform has published a credit risk analysis updated to 2019 showing good standing (what's the current situation after 2020 is unknown...)
There's no debt of any form, probably due to the long terms needed to get a bank financing. My impression is that the developer is in hurry to start this deal as soon as possible to benefit from the large incentives in Italy related to the demolition and reconstruction. This is evident also in the iter related to the construction license, where the municipality has been involved requering some integrations. Here there's a large question mark of the entire project: this permit has not yet officially obtained and there are a few risks to be revoked or delayed due to the involvement of the Historical Architecture body.
Also the selling prices of the units are very high relative to the comparables and the constructions costs and marketing costs on the lower side of the spectrum: i think that on the business plan is represented a best case scenario. No contingency costs etc (absorbed by the construction company as they stated..). I think that they pushed up the prices because they can sell units with the discount permitted by the financial incentives.
But what will happen if there's any delay in the development? The incentives actually have a deadline next year!
There's no presales (another reason to be entirely equity funded.
Above with a 3mln issue.
Resuming: on paper a deal with large margins, irrealistic to be closed at those terms so i think that the final ROI will be lower. Also some low but potentially impacting regulations problems.
However the KPI on these deals remain too appealing to not attract investors, culled by the track record of the developer. I see large probability of good gains also in negative scenarios (let's see the sensitivity analysis) but issues in a worst case scenario, more related to regulative issues and strict terms to be completed.
I think that this deal will be raised in a few hours... let's see.
@28/01/21: as forecasted, target reached in 2 hours and 3 mln in less than 24 hours.