Beyond Debt Funding Projects Through Equity

Transcription

1 N O R T H M A R Q C A P I TA L Beyond Debt Funding Projects Through Equity JULY 2013 Presented by: Melissa Marcolini Quinn

2 The Nature of Equity vs. Debt

3 Debt vs. Equity Most developers want to maximize the debt portion Why? It s cheaper, and generally easier to obtain Most developers also want to utilize external equity instead of their own Why? More capital available for their core business Especially true for merchant builders (those that don t hold projects long term) Most projects take months to build, stabilize, and sell or recapitalize

4 Equity Structures

5 Equity Structures Joint Venture (JV) Equity Limited Sponsor (Developer) Co-Invest Significant Sponsor (Developer) Co-Invest Preferred Equity aka Mezz Equity or Construction Mezz Participating Mezz

6 Equity Structures JV Structure Traditional structure. Limited Co-Invest - Typically sponsor (developer) invests a small portion of the equity requirement, while the Institutional Equity Partner invests the majority of the equity. Ex. $40,000,000 construction project. If debt funds 75% of cost, that leaves $10,000,000 of equity to be raised. A typical 90/10 structure would look like: $40,000,000 Project cost $30,000,000 Debt (Lender) $10,000,000 Equity $1,000,000 10% provided by GP (Developer) $9,000,000 90% provided by LP (Outside Investor)

7 Equity Structures JV Structure Both the sponsor (developer) and investor earn the same preferred return which is a return on their investment over the life of the project paid out from project CF distributions. The percent can vary from 8%-12%. Ex. 10% preferred return paid pari passu - $900K to Investor $100K to developer. After the Preferred Return distributions, then the structure moves to a series of waterfall distributions where cash flow is split between sponsor (developer) and investor.

8 Equity Structures JV Structure After 10% Preferred Return Pari Passu 75% to Investor and 25% to the Sponsor, until the investor achieves an overall IRR (Internal Rate of Return) of 16% 60% to Investor, 40% to Sponsor, until the investor reaches 24% IRR. After the 24% IRR is reached then all remaining cash flow (including sale proceeds) is split 50/50 This structure allows the Sponsor (Developer) to invest relatively little cash, while earning high returns after the Investor achieves their returns

9 Equity Structures Preferred Equity Also called Mezz Equity, this structure is becoming much more common among institutional players. It is simpler than a JV and involves a known coupon payment to the Investor Generally greater protection and less risk to the Investor than a traditional JV structure.

10 Equity Structures Preferred Equity Generally the sponsor (developer) is required to contribute anywhere from 10 15% of the total project cost. Instead of a profit split, the coupon payment to the Investor is anywhere from 11-16% Coupon often divided between current pay and accrual. Current funded escrow upfront through an initial escrow. The developer benefits from receiving ALL the project s returns after the coupon is paid, BUT has to come to the table with more money

11 Equity Structures Preferred Equity / Mezz Equity Example $40,000,000 development project with a 75% LTC construction loan (or $30,000,000), the Investor contributes 15% of the project cost or up to 90% of the capital stack and the developer funds the remaining 10%: $40,000,000 Project cost $30,000,000 Debt (Lender) $6,000,000 Mezz Equity (Outside Investor) $4,000,000 Sponsor Equity (Developer) Investor receives coupon payment

12 Equity Structures Participating Mezz Hybrid between Preferred/Mezz Equity structure and JV structure In addition to receiving a coupon payment, the Investor participates in the profits of the project with the developer In exchange for receiving the profit participation, the Investor will typically accept a lower coupon payment or contribute a larger portion of the capital stack (95% for example)

13 Equity Structures Participating Mezz $40,000,000 development project with a 75% LTC construction loan ($30,000,000), the Investor contributes 20% of the project cost or up to 95% of the capital stack, meaning the developer funds the remaining 5%: $40,000,000 Project cost $30,000,000 Debt (Lender) $8,000,000 Mezz Equity (Outside Investor) $2,000,000 Sponsor Equity (Developer) Investor receives lower coupon payment but also profit participation of 20-30% of all cash flows

14 Deal Structure Comparison Typical terms and Capital Stack breakdown for the four different structures discussed: Equity Structures: Joint Venture w/ Limited Sponsor Co-invest Joint Venture w/ Significant Sponsor Co-Invest Preferred Equity Mezz Equity Participating Mezz Investor Equity % 90% of Equity 75% of Equity 90% of Total Cost 95% of Total Cost Sponsor Equity % 10% of Equity 25% of Equity 10% of Total Cost 10% of Total Cost Preferred Return 10% 10% 14% 12% Cash Flow Distribution Structure 75/25 to 16% IRR 60/40 to 24% IRR 50/50 thereafter 60/40 to 14% IRR 35/65 to 24% IRR 30/70 thereafter 30% to Mezz Debt (75% of Total Cost) $30,000,000 $30,000,000 $30,000,000 $30,000,000 Investor Equity $9,000,000 $7,500,000 $6,000,000 $8,000,000 Sponsor Equity $1,000,000 $2,500,000 $4,000,000 $2,000,000 Total Cost $40,000,000 $40,000,000 $40,000,000 $40,000,000

15 1. JV 90/10 Equity Structures: Joint Venture w/ Limited Sponsor Co-invest Joint Venture w/ Significant Sponsor Co-Invest Preferred Equity Mezz Equity Participating Mezz Investor Equity % 90% of Equity 75% of Equity 90% of Total Cost 95% of Total Cost Sponsor Equity % 10% of Equity 25% of Equity 10% of Total Cost 10% of Total Cost Preferred Return 10% 10% 14% 12% Cash Flow Distribution Structure (after Preferred Return is paid) 75/25 to 16% IRR 60/40 to 24% IRR 50/50 thereafter 60/40 to 14% IRR 35/65 to 24% IRR 30/70 thereafter 30% to Mezz Debt (75% of Total Cost) $30,000,000 $30,000,000 $30,000,000 $30,000,000 Investor Equity $9,000,000 $7,500,000 $6,000,000 $8,000,000 Sponsor Equity $1,000,000 $2,500,000 $4,000,000 $2,000,000 Total Cost $40,000,000 $40,000,000 $40,000,000 $40,000,000 Advantages Less Sponsor Equity Required Less Risk, Equity is Pari Passu Traditional Format for Institutional Capital Investor shares in downside risk Disadvantages Investor participates in majority of upside Investor controls major decisions Sponsor gets less % of Profit

16 2. JV 75/25 Equity Structures: Joint Venture w/ Limited Sponsor Co-invest Joint Venture w/ Significant Sponsor Co-Invest Preferred Equity Mezz Equity Participating Mezz Investor Equity % 90% of Equity 75% of Equity 90% of Total Cost 95% of Total Cost Sponsor Equity % 10% of Equity 25% of Equity 10% of Total Cost 10% of Total Cost Preferred Return 10% 10% 14% 12% Cash Flow Distribution Structure (after Preferred Return is paid) 75/25 to 16% IRR 60/40 to 24% IRR 50/50 thereafter 60/40 to 14% IRR 35/65 to 24% IRR 30/70 thereafter 30% to Mezz Sponsor Equity $ $1,000,000 $2,500,000 $4,000,000 $2,000,000 Advantages Sponsor gets greater % of profit Less risk, equity is pari passu Significant Sponsor (Developer) coinvest differentiates the deal Investor shares in downside risk Disadvantages Investor still participates in majority of upside Investor still controls major decisions

17 3. Preferred Equity / Mezz Equity Equity Structures: Joint Venture w/ Limited Sponsor Co-invest Joint Venture w/ Significant Sponsor Co-Invest Preferred Equity Mezz Equity Participating Mezz Investor Equity % 90% of Equity 75% of Equity 90% of Total Cost 95% of Total Cost Sponsor Equity % 10% of Equity 25% of Equity 10% of Total Cost 10% of Total Cost Preferred Return 10% 10% 14% 12% Cash Flow Distribution Structure (after Preferred Return is paid) 75/25 to 16% IRR 60/40 to 24% IRR 50/50 thereafter 60/40 to 14% IRR 35/65 to 24% IRR 30/70 thereafter 30% to Mezz Sponsor Equity $ $1,000,000 $2,500,000 $4,000,000 $2,000,000 Advantages Sponsor gets greater % of profits Low cost of capital Control of major decisions including Sale/Refinance Disadvantages Greater risk to Sponsor (Developer) More Sponsor equity required Sponsor is subordinate to pref equity Inter-creditor Agreement Minimum return to Investor required, prepayment penalties

18 4. Participating Mezz Equity Structures: Joint Venture w/ Limited Sponsor Co-invest Joint Venture w/ Significant Sponsor Co-Invest Preferred Equity Mezz Equity Participating Mezz Investor Equity % 90% of Equity 75% of Equity 90% of Total Cost 95% of Total Cost Sponsor Equity % 10% of Equity 25% of Equity 10% of Total Cost 10% of Total Cost Preferred Return 10% 10% 14% 12% Cash Flow Distribution Structure (after Preferred Return is paid) 75/25 to 16% IRR 60/40 to 24% IRR 50/50 thereafter 60/40 to 14% IRR 35/65 to 24% IRR 30/70 thereafter 30% to Mezz Sponsor Equity $ $1,000,000 $2,500,000 $4,000,000 $2,000,000 Advantages Lower equity contribution than Mezz Equity Lower coupon payment than Mezz Equity Control of major decisions including Sale/Refinance Disadvantages Greater risk Sponsor(Developer) is subordinate to pref equity Inter-creditor Agreement Minimum return to Investor, prepayment penalties Investor participates in upside

19 Equity Stats

20 NMC Equity Raised Trailing 5 years Property Type Volume % of Total Multifamily $954,792,825 74% Office $179,062,500 14% Hospitality $50,600,000 4% Other $34,929,224 3% Retail $33,382,788 3% Land $25,850,000 2% Industrial $10,290,533 1% Total $1,288,907, % Multifamily 74% Multifamily Office Hospitality Office 14% Other Retail Land Industrial 1% Land 2% Retail 2% Other 3% Hospitality 4% Industrial

21 QUESTIONS? Presented by: MELISSA MARCOLINI QUINN NORTHMARQ CAPITAL, LLC