Construction Investment Corporation (CIC) is a venture
capitalist form which invests in growing construction firms. To
avoid the bust and low returns, CIC must perform due diligence
in accessing the viability of providing bridge financing for The
Newco Project Company (Newco), a startup home builder. For
Newco, the current outlook for the industry is excellent. The
problem is there is a high potential for a \u201cdot com\u201d type bust
to occur in the construction industry. Even the professionally
optimistic housing economists employed by the real-estate
industry are now admitting that the good times may be over
(Wallace-Wells, 2004). This paper describes CIC\u2019s investment
criteria, lists the potential issues, develops a checklist,
explains the importance of each checklist item, and describes
how the checklist impacts the Newco bridge financing investment
CIC has requirements for its potential construction
investment targets. The target firm must show current traction
and future sustainability. CIC measures its potential
investments using a simple formula. The investment must yield a
return on equity (ROE) of 15% above the weighted average cost of
capital (WACC) for the industry. According to Damodaran (2003)
of the Stern School of Business, the WACC for homebuilding is
6.83%. The WACC represents the rate that CIC could garner by
safely lending the same money to an established company in the
homebuilding industry. Any issues which reduce CIC\u2019s ability to
exceed the annual 21.83% should be detected by the checklist.
There are many situations that can lead to an under
performing investment (1) lack of customer traction (T), (2)
lack of sustainability (S) (Belove, 2002), and (3) legal
entanglements (L). Without traction and sustainability, Newco
may be too risky and take to much time to meet ROE requirements.
Legal issues can be very costly to both traction and
sustainability by tying up resources. Based on a review of
business literature, the following issues are common to
construction firms (Witkowski, 2001; Himelstein, 2003 & Nax,
2003). Potential critical legal issues (L) are in bold.
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