Equity Structures
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Prior to working with Prodigious Capital Advisors, many developers and operators assumed the unfamiliar role of fundraiser. Turning to family, friends or the first institutional investors who came along, they attempted to finance their deal without a full understanding of all the options available to them. Our clients recognize the benefit of engaging our firm to identify, structure and secure institutional equity for their real estate projects. Our expertise, commitment and credibility ensure the deal gets properly financed, allowing the Principal to spend their time adding value to the project.

Read more about the Pros and Cons of Institutional Joint Venture Investment Programs

Equity Investments may take the form of; 

Entity Level Equity Capitalization          Forward Pre-Purchase Commitment

Preferred Equity          Programmatic Equity         Joint Venture Equity

Equity is the most fractured segment of the capital markets relative to the scope and spectrum of potential sources and structures that exist. Our experienced team of investment bankers is familiar with the nuances and deal structures of various investor programs and will help negotiate the most viable deal achievable in the market place.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Entity Level Equity Capitalization

Real estate remains a highly fragmented industry in which regionally focused operators often have the advantage over national firms in terms of market familiarity and access to deal flow.  However, regional operators are often times burdened by inefficient and costly access to capital, usually raised on a deal by deal basis.  For the seasoned, qualified real estate operator seeking to expand their platform, an entity level equity capitalization would provide the necessary long-term capital. 

The investment by an institutional source can take the form of; convertible preferred stock, convertible debentures, trust preferred securities or subordinated notes.  

Proceeds from an entity capitalization can be used to fund corporate overhead and expansion, recapitalize current illiquid interests thereby providing liquidity and fund GP co-investment requirements if the firm seeks to bring in LP investor in the future for larger acquisitions.

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Programmatic Equity

Many Sponsors believe that having a discretionary fund to execute their investment thesis is the panacea for many of their capital raising problems.  It is extremely difficult, especially in the current market environment for first time fund managers to raise capital for fully discretionary funds.  However, simply having discretionary funds does not mean that a Sponsor should loose their discipline and pursue opportunities that are subpar.  If a Sponsor has located a great opportunity he must simply locate a money source that shares the same viewpoint.  An excellent option that exhibits the characteristics of both joint venture equity and proprietary funds ("Discretion in a Box") is a programmatic equity relationship with an institutional partner.

Prior to actually having a deal (or sometimes running a parallel track if one is available) the Sponsors track-record, business strategy and overall character is evaluated by a potential capital partner.  If there is a match then a core set of deal terms is negotiated under which the two partners will seek to pursue appropriate opportunities.  This structure is advantageous to the Sponsor due to the pre-vetting of his partnership terms and investment guidelines making it much more likely that the institutional investor will fund a given deal.  The institutional investor also benefits from receiving a dedicated pipeline of relevant transaction opportunities with an operating partner that they have already signed of on.

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Preferred Equity

At times when the senior lender does not allow secondary financing or the encumbrance of partnership interests, an investment can be structured as preferred equity. Under this structure the investor funds capital directly into the ownership entity effectively becoming an equity partner. However the investor’s capital is treated as senior to that of the other partners from a return of and usually a return on capital standpoint. Similar to a mezzanine investor, the preferred equity investor is usually paid a set coupon that can have both a current and accrued component. Sometimes the investment can have an IRR look back component as well.

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Joint Venture Equity

This capital structure will likely be the highest cost of capital if the project is successful, but entails the least downside risk since the sponsor's equity contribution can be a nominal amount relative to the total equity requirements and is generally invested on equal footing (pari-passu) with the institutional investor's equity. Investor project involvement, while it can vary significantly between different equity investors, is usually highest with this type of investor.

While there are multiple promote structures that exist in the marketplace the most common form is found in the multi tiered waterfall structure. Under this scenario the project's sponsor co-invests approximately 5%-20% of the required equity with the balance coming from an institutional partner. All capital may be treated parri-passu until a preffered return hurdle of approximately 8%-13% is achieved. Thereafter the project's sponsor begins to benefit from an IRR driven promote which effectively gives him a higher proportion of a deals profits relative to his percentage invested capital. A promote structure may have multiple hurdles rates once achieved provide the project's sponsor with an ever increasing proportion of the deals profits.

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Forward Pre-Purchase Commitment

A forward pre-purchase agreement involves a commitment by an institutional quality entity such as a REIT, insurance company or pension fund to purchase a to-be-built property upon it achieving a predetermined occupancy and lease up schedule as well as delivery of a certificate of occupancy. Unlike the forward standby commitment, which is never really intended to be funded, the forward pre-purchase issuer's objective is to purchase the subject property once all set hurdles are met. This structure is generally utilized to act as a credit enhancement enabling the developer to get better terms on a construction loan.  Some provisions unique to Pre-Purchase Structures to be negotiated include:

  • Determination of the exit cap rate
  • Allocation of imputed equity due to development value creation
  • The length of earn-out “tail” and ability to receive multiple draws
  • For underwriting purposes the net operating income standards to be capitalized – operating expenses, taxes, maximum occupancy, reserves, management fees, etc.
  • The look-back period for deriving NOI to be capitalized
  • Developer rights to retain a carried interest or convert to a joint-venture structure
  • Allocation and responsibility for closing costs

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