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Types of Capital Structure

Real estate capital/equity can be structured as either debt or as a cash investment. A

debt/mezzanine structure is expensive financing with yields in the low to high teen range
but it’s a cheap partner because there’s no profit participation; however, the added debt
load can put a stress on the project’s lending ratios so debt/mezzanine capital works best
on value added real estate. The alternative capital structure is a traditional cash
investment which means you have a financial partner who expects to participate in the
project profits.
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 will be distributed on a pari passu basis.
Preferred Equity:
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:
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:d
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.
Development Agreement:
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.