Real estate capital can be structured as either debt or as a cash investment. A debt/mezzanine structure is expensive financing with yields in the low to the high teen range, but it’s a cheap partner due to the no profit participation. The alternative capital structure is a traditional cash investment, which means you have a financial partner who expects to participate in the project profits.
We offer mezzanine financing, preferred equity, development agreement structures, and joint venture equity to our clients to determine and pursue the best execution for each real estate transaction.
Mezzanine debt provides developers with subordinate debt funding up to approximately 90% of the value of the property. This program is attractive to developers who want to retain a greater share of the profits. The first mortgage is the higher risk and higher yield instrument, which has either a higher coupon or exit fee. The lender may be the same for both debt instruments or there may be two different lenders. The structure is particularly good for developers who want to retain 100% ownership.
Preferred equity is best suited for situations where the developer lacks the additional capital required to bridge the gap between debt and purchase or development costs. A preferred equity investment is typically structured so that the investor received its investments plus a preferred return and participation in profits to achieve their target internal rate of return.
A development agreement is where the investor actually takes the ownership position and through an agreement, contracts the developer to build and manage the asset. The developer receives 25% to 30% of the profits. This is ideally suited for developers who have no cash equity of their own, young developers with an experienced background but just starting out on their own, and for those developers who want to minimize risk.
Joint venture equity is traditional equity investment into the ownership entity as a partner member or stockholder. Investments are with qualified developers and operations in transactions where there is a significant opportunity for value creation or cash flow enhancement. The equity and preferred return will be distributed on a percentage basis.