A real estate attorney once handed me his business card. The back of the card revealed a simple but thought-provoking message:
Price, Speed, Quality
Have you given much thought to the interdependent relationship between Price, Speed, and Quality in the world of commercial real estate finance?
Our firm is constantly barraged with an array of debt and equity requests, many of which are on a “FAST TRACK” to get bought, built, or both. Time is the critical factor. Everyone has to meet purchase contract timeframes that did not anticipate upcoming vacation schedules or holiday seasons. Oops, something has to give. You can’t have your cake exactly when you want it (Speed), expect it to taste great (Quality) and not be willing to pay for it (Price).
In the CRE world, capital is equivalent to cake… everyone wants to have it and eat it, too. Capital comes in a variety of delicious flavors from low leverage debt to high sugar content equity. And of course, not all capital (or cake) is created equal…just ask Betty Crocker or Duncan Hines when the show gets stolen by a chef-prepared masterpiece with connoisseur ingredients and elaborate decorations. Similarly, capital can be infused with all sorts of additive options such as prepayment flexibility, no escrows, higher leverage, performance earn-outs, interest-only payments, buy-out options, etc., etc., etc. All of this yummy stuff will make your deal taste much better, but it comes (like everything in life) at a price and may affect the speed at which a transaction can be executed.
The situational components of a transaction usually dictate the nature of the most appropriate source of capital.
For example, faced with a maturity default, one of our Clients was able to negotiate a favorable discounted payoff (DPO) on his existing loan. The Client had to PICK TWO. He needed a new financing that could close quick (Speed) along with a high degree of certainty (Quality). MCA secured a bridge loan proposal in less than a week from a Lender with a one-man loan committee. The interest rate on this quick close bridge loan was almost twice as much as current long-term fixed rates; however, the amount of savings from the DPO offset the interest cost by a ratio of 10 to 1.
Ground up construction can usually afford one the time to carefully shop the capital markets so that Speed becomes secondary. What is important is the cost of capital (Price) that directly affects the project profitability along with identifying a financing source that will “hang in there” (Quality) when the project runs into the inevitable unforeseen circumstances. A forward-thinking developer will give himself plenty of time to find the right construction lender that offers the most favorable pricing matrix along with the most flexibility so that the financing can be tailored to the needs of the project.
Once again, Price and Quality are usually under the microscope when considering the refinance of an existing, cash-flowing property to a permanent mortgage. After all, since the property is fully leased, of course the Borrower deserves the lowest cost of capital from a provider that differentiates itself by offering all that is needed to meet the Borrowers investment objectives. But keep in mind that the Price will start to move as you add quality ingredients such as flexible pre-pay, forward rate locks, and all the other things that make deals even more delicious.
Many situations require a strategy that relies on layering several pieces of financing to complete the capital stack. “PICKING THE RIGHT TWO” can be challenging when dealing with multiple capital providers that have conflicting interests.
Our firm recently completed its own “Bake-Off Reality Show” when a Client showed up with a 60% leased retail/service center acquisition opportunity being purchased at a favorable basis with a good story about the lease-up play. Our Client was “firm” on earnest money with a distressed Seller insisting on closing the property sale in less than 6 weeks.
Out came the mixing bowls, and we turned on the ovens!!!
We needed a favorably-priced, fast-closing acquisition loan (Price & Speed) along with a creamy, sweet tasting equity provider (a double dose of Quality) who understood the lease-up risk and long-term potential of the property.
Without revealing all of our kitchens secrets, we concocted a $16 mm triple layer masterpiece consisting of:
- $10,400,000 Acquisition Loan priced @ 5% for 65% of the Capital Stack
- $1,400,000 Mezzanine Loan priced @ 14% that pushed the debt to 75% of the Capital Stack
- $4,200,000 Equity Partner providing 90% of the Equity for a 75% ownership stake
Our Client/Sponsor topped off our creation by investing 10% of the equity requirement as a Sponsor Co-Equity Investment.
Ding! Time’s up! Voila!
Six weeks later our Client purchased what is now the largest property in his portfolio with a 25% Promoted Interest. The first mortgage and mezzanine Lenders each made well-secured, appropriately-priced loans, and the Equity Provider is projected to make more than 2X on its investment. Everyone got their cake and got to eat it, too! Our Client/ Sponsor ended up with a nice slice of a much bigger cake.
Picking the right “TWO” with the appropriate capital provider is at the heart of driving a transaction to a successful closing. Naturally, our firm would insist it is always in your best interest to use a competent intermediary (preferably Metropolitan Capital Advisors) to guide you toward the right capital and to help you make the right TWO PICKS.
Contact any one of our Senior Directors at 972-267-0600 to discuss your next project finance assignment or visit our website at www.metcapital.com .