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108103 Resource 78777 78860 1071 1132263219890 1215928682742 Controlled Structured Finance and Venture Equity

Pension Funds Will Loan Up to 90% of a Developer's Required Equity

When a developer applies for a construction loan, the bank will normally require that he contribute 20% of the total cost to build the project.  In other words, if the total cost to build a condo project is $30 million, the developer will be expected to cover the first $6 million of the cost.   The bank will provide a construction loan in the amount of $24 million to cover the balance of the cost. But very few developers have an extra $6 million laying around to put into a project.  The developer will then seek either a mezzanine loan, a preferred equity investment, or venture equity, typically from a pension fund or a mezzanine lender. Let's say the developer has $3 million of his own money into the $30 million deal, which is 10% of the cost of the project.  Three million is a sizeable investment.  The developer may not be willing to give up part-ownership (equity) or even a percentage of the profits (equity kicker) in order to attract another $3 million in capital.  In a case like this, the additional $3 million investment by an outside investor may be structured as a mezzanine loan.  Because the loan-to-cost ratio of 90% is high, the investment is very risky.  Such a high mezz loan might be priced at 12% and 2 points, with an exit fee of 1 to 2 points. Sometimes the underlying construction lender will be uncomfortable with a mezzanine loan behind them.  Mezzanine loans have payments.  If the developer defaults on these payments, some strange mezzanine lender from out-of-state and with no roots in the community will take over the project.  The construction lender may therefore object to the mezzanine financing and refuse to sign an inter-creditor agreement. In cases like this, the $3 million investment from the pension fund or mezzanine lender may be structured as preferred equity.   A preferred equity investment is technically not a loan.  If a preferred equity investor is not paid his agreed return, however, the preferred equity investor can still take over the project.  The effect is little different than a mezzanine loan.  Let's assume in our example that the developer has a great project, but he lacks the cash to put up more than $600,000 or so.  In a case like this, the developer will need to seek venture equity.  A venture equity investor, often a pension plan, will sometimes contribute up to 90% of the developer's required equity!  In our example, the total project cost was $30 million.  The developer's required equity is 20% of $30 million or $6 million.  The venture equity investor may be willing to contribute up to 90% of that $6 million - or $5.4 million. Venture equity is very, very expensive.  A venture equity investor may demand a preferred return of 8%.  In other words, before the developer makes a dime for all of his vision and hard work, the venture equity first gets a minimum of 8% on its investment.  Then the venture equity investor may get 50% of all of the remaining profit. A developer can find hundreds of commercial construction lenders and mezzanine lenders on C-Loans.com. 9 application/xml false commercial construction lender commercial construction loan commercial financing commercial loan commercial mortgage commercial real estate loan mezzanine lender mezzanine loan preferred equity C-Loans Commercial Mortgage Lender Databank Find Hundreds of Commercial Construction Lenders and Mezzanine Lenders http://www.c-loans.com/onlineapp Mozilla/4.0 (compatible; MSIE 7.0; Windows NT 5.1; .NET CLR 1.1.4322; .NET CLR 2.0.50727) 127.0.0.1 127.0.0.1 johngaudio 216.87.92.57 false true false false true 198508 false false true false false false true 78777 blog blogsite/CLoans/web