Equity Financing
Equity Overview
Texas Commercial Mortgage sources and originates several types of equity for the acquisition, rehabilitation, renovation, redevelopment and ground-up construction of apartments, retail centers, office buildings, industrial office warehouses and hotels
Access to equity to fully capitalize on your project can come from a variety of sources ranging from high-net-worth individuals to well-capitalized financial institutions like life insurance companies and retirement and pension funds.
Equity is generally divided into two main categories. The first category is often referred to as Equity Financing or less commonly referred to as an Equity Loan. Equity Loans are a type of nontraditional real estate financing available to property owners who desire higher amounts of leverage. This type of nontraditional real estate financing used most often by investors, property owners and developers is commonly referred to as Preferred Equity. The second category of equity that does not involve lending money is simply referred to as Joint Venture Equity.
Preferred Equity
Preferred equity is another type of nontraditional real estate financing used by property owners to fill the “gap” between the senior mortgage and the property owner’s cash down payment (property owner’s cash equity contribution).
Unlike mezzanine loans preferred equity lenders become an equity owner in the partnership with special “preferred” rights and remedies. In exchange for the capital contribution, the preferred equity lender will be placed in a senior position to that of common equity owners and will be given certain control rights. Preferred equity lenders do not have any foreclosure rights, instead they possess superior contractual rights (provided in the partnership operating agreement) with respect to cash distributions and repayment of principal. In general, preferred equity financing will commonly consist of the following special “preferred” rights and remedies:
The right to receive a “ preferred rate of return” on its capital investment
The right to an accelerated repayment of its initial capital contribution (its original principal)
“Change of Control Event” – a specific contract remedy set forth in the organizational documents in the event of a financial delinquency.
Joint Venture Equity
Equity that involves investing capital directly in the ownership of the partnership is referred to as Joint Venture Equity or JV Equity. Providers of Joint Venture Equity are referred to as “Capital Partners” who will typically invest 50% to 90% of the total required common equity. The developer or real estate investor who is seeking the joint venture equity is referred to as the “Operating Partner” or “Sponsor”. Operating Partners usually provide 10% to 20% of the total required equity in exchange for a specified “carried interest” or “promotion” ranging from 10% to 40%.
The investment period or horizon offered by providers of JV equity is typically three to seven years. New ground-up construction, value-add acquisitions, and rehab/redevelopments are the type of transactions best suited for JV equity. Conversely, existing stabilized cash flowing properties with low capitalization rates and low expectations of capital appreciation are usually considered ill-suited for joint venture equity. The structure and complexity of joint venture equity typically varies based on the type of property and the level of risk associated with the type of transaction. The chief elements or unique characteristics of joint venture equity most often include the following:
Minimum Preferred Return or IRR Hurdle
A “Waterfall” type of cash flow distribution
Operating Partner/Sponsorship “Promotion” or “Carried Interest”
Custom-tailored “partnership operating agreement”
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