Capital Formation
Corporate and institutional clients as well as national, regional and local sponsors often retain the advisory services of Terrace Capital to assist in engineering the proper capital structure for a proposed transaction. Whether you require assistance in either modeling or securing commercial real estate financing, TC can assist you in achieving your goals. The following table represents some of the more common layers of the capital structure that are present in many transactions:
| 1st Mortgage |
1st Mortgage Debt provides developers or investors with primary debt funding up to approximately 75-80% of the value of the property. The first mortgage is typically straight debt is the lowest risk instrument, in the capital structure of a deal. This type of financing is the most prevalent of all types available in the market place. |
| 2nd Mortgage |
2nd Mortgage Debt provides developers or investors with a secondary debt funding up to approximately 80-85% of the value of the property. The second mortgage is typically straight debt and is the 2nd lowest risk instrument, in the capital structure of a deal. This type of financing is the less prevalent, though generally available in the market place for Class B properties or greater in primary market places. |
| Mezzanine Debt |
Mezzanine Debt provides developers or investors subordinate debt funding up to approximately 90% of the value of the property. This product is NOT secured by real property as in 1st and 2nd mortgages; it is usually secured by a pledge of shares or partnership units. This is a high risk instrument and is generally priced accordingly. |
| Equity |
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. |
| Preferred Equity |
Preferred Equity is best suited for situations where the developer or investor 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. |
| 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. |
Releasing "Trapped Equity"
The concept of "Trapped Equity" is a common misconception in today's commercial real estate market. In most cases equity is only "Trapped" if you don't know how to free it up. Granted, the growth of the CMBS market (specifically understanding the impact of securitization as it relates to more uniform and restrictive loan documents and the increased complexity of servicer, sub-servicer and special servicer relationships) since 1996 has made monetizing on the appreciation of an asset more complex, however not at all unfeasible.
Terrace Capital's advisory services can assist you in releasing "Trapped Equity" by using anyone or combination of the following strategies:
• Defeasing assets or portfolios of assets.
• Using preferred equity, mezzanine or other structured finance solutions.
• Making entity level investments.
• Synthetic or derivative financial engineering strategies.
Let TC's advisory group help you gain access to the value you've created. |
