Capital Formation Services
Traditional equity investment into the ownership entity as a partner, member or stockholder. Investments are with qualified developers and operators in transactions where there is a significant opportunity for value creation or cash flow enhancement. The equity and preferred return are typically distributed on a pari passu basis.
Preferred Equity is best suited for situations where the developer lacks the additional equity capital required to bridge the gap between debt and purchase or development cost. A Preferred Equity investment is typically structured so that the investor receives its investment plus a preferred return and a participation in profits to achieve their target IRR.
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 typically straight debt and the second mortgage is the higher risk and higher yield instrument, which has either a higher coupon or exit fees. The lender may be the same for both debt instruments or could be two different lenders. This structure is particularly good for developers who want to retain 100% ownership.
Participating Debt leverages the property to 90% of the cost and as much as 80% of the stabilized value of the property, typically in a blended first and second mortgage structure. This type of structure has many of the characteristics as Mezzanine Debt, but typically there is only one lender.
The investor actually takes the ownership position and through a Development 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.