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In the current lending environment with relatively low available leverage, many of our clients are now seeing significant funding shortfalls. Banks, credit unions, private lenders, and other lending sources have reduced leverage as a result of either increasing their required debt yields or the interest rate they use for underwriting debt service coverage ratios. In turn, many of our clients are asking how to fill the resulting funding gaps.
Equity is the most common solution for this, either as Preferred Equity or Joint Venture Equity. While there is no simple answer, and every situation is unique, we can offer a general sense of the equity terms available in the market.
Preferred Equity for existing properties will generally (but not always) require a preferred return of 6% or higher, with a fixed accrual rate between 11% (for low leverage deals limited to about 70% LTV) to 16% (for leverage up to 80-85% LTV); modestly higher leverage may be available but would also require some sort of equity kicker (a profit participation).
Preferred Equity will typically have the same term as the senior loan, and is most often limited to a 3-5 year term, but can be up to 10 years or more. Preferred Equity for a construction project is likely to have a modestly higher return requirement and lower leverage than for existing assets, but the leverage and pricing will generally still be within the ranges referenced above.
Joint Venture Equity (or JV Equity) structures generally provide investors with a preferred return and then a percentage of profits that declines as the project’s return increases. Such investors typically look for returns between 15% and high-teens on value-add deals, depending on the investor and the particular opportunity. Targeted investor returns for development projects will generally be at least high-teens.
That said, many JV equity investors have shifted their risk profile recently by switching to offering preferred equity instead: they can now get their targeted returns in a preferred equity structure with a lower level of risk. As such, obtaining JV equity in this environment can be more challenging with less such capital available.
With the general guidance above, we collaborate with our clients to develop the most advantageous capital solutions to fill their funding gaps. Our list of over 200 equity sources is then distilled to a targeted selection of those investors based on the type of investment, geographic area, investment amount, and property type in order to find the equity partner that best fits the need.
We draw on our structuring experience and breadth of capital relationships to overcome the capital challenges of the current financial environment and serve our clients’ needs.
Are you interested in connecting with financing solutions for your real estate investments? Soundview Commercial Capital can help. Reach out to us below:
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