Loans for most asset types from $500K to $50M.
Loans for most asset types from $500K to $50M.
Common equity is the initial cash into the deal and typically represents 15-20% of the total Capital Stack needed to close. If the Principal or Sponsor Group does not have enough funds to achieve the 15-20%, they usually need to source additional equity or collateral to fulfill that lender requirement. If the collateral is not sufficient, Preferred Equity, Mezzanine Debt, a Joint Venture Structure or a Hybrid combination can be used to obtain the Senior Debt to close the deal.
Common Equity holders have the most risk and are typically paid last when the funds are distributed in net revenue or proceeds at sale or refinance.
Generally, Common Equity will receive a higher return than other Members in the Capital Stack.
Preferred Equity is typically used when there is a gap between the Common Equity and the Senior or Mezzanine Debt. Preferred Equity compliments Common Equity and receives priority return and percentage of the distributions in revenue and interest before Common Equity but after both Senior and Mezzanine Debt. That is a primary reason Preferred Equity always carries higher fees and rates of interest.
When Preferred Equity is structured correctly within the capital stack, it increases leverage
and can also increase the return on investment.
Preferred Equity is usually flexible and can range from "hard" which has a fixed coupon and maturity date or "soft" which usually includes a share of the financial upside.
Mezzanine financing is a hybrid of debt and equity that gives the lender the rights to convert to an ownership position or equity interest in the company in case of default after senior lenders are paid. Mezzanine Debt typically has a higher rate of return than Senior Debt but lower than Equity. Mezzanine financing is treated like equity on a company's balance sheet and the lender typically has the ability to quickly take control of the property if the developer is unable to perform.
The Senior Debt typically represents 70-80% of the total amount of the entire Capital Stack for most commercial real estate asset types. It is also typically the first position loan and it carries the most security in the deal in terms of foreclosure or receivership.
The Senior Debt costs are generally lower and better for the borrower and the due diligence process is normally less intensive and time consuming than that of Preferred Equity.
The distributions of all net income and proceeds are generally paid first to the owner of the Senior Debt.
Joint Ventures are primarily used when the Principal does not have enough money into the deal to attract the interest of Preferred Equity or Mezzanine Financing. The JV structure is very expensive as it will normally take 80-90% of all proceeds and income in addition to the ability to replace the Principal if there is an issue and they feel their funds may be in jeopardy.
This type of financing is normally reserved for the best projects and most qualified Principals.
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Over 30 years of Commercial Real Estate Financing