of Capital Structures
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.
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.
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.
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.
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.