What is Preferred Equity?
Preferred Equity is equity, which is senior to common equity in the capital stack, but junior to debt. The preferred equity investment is paid back after your lender’s debt, but before the GP or any other investors.
How much will your invest as a percentage of project value?
Our preferred equity is generally limited to 80% of final building value, and 50-60% of the common equity stack. You are able to bring in capital from other investors as common equity.
How are your preferred equity investments structured?
Our preferred equity investment is not debt, and is not structured as a traditional loan/mortgage. We structure our investment in an operating agreement for the LLC that owns the property. We have a standard form operating agreement that replaces or amends your current OA, and stipulates our rights and protections, and the terms of the investment.
Are you compatible with other lenders?
Yes, since we do not require a traditional junior lien, we are very compatible with most lenders.
Do you have preferred lenders that I can work with?
Yes, we can recommend various local and regional lenders that are familiar and comfortable with our structure.
Do you provide the debt if we don’t have a lender?
Yes, in most cases we can also provide the debt for your project. We do this in partnership with local lenders. This is the Origin Funding business and is separate but complementary to our investment from the Origin Funds. This allows us to be a “one-stop shop” for both your debt and equity. In these instances, we may provide a personal guarantee (either on your behalf or in conjunction with your guarantee), and charge a fee for this service. In return, we’ll bring a local commercial lender to the table, and will facilitate and handle most aspects of the loan. You would indemnify Origin Funding for any losses related to the loan. This provides the developer with excellent overall capital terms, and easy execution. These loans come with standard covenants.
How are you a partner?
We are not a lender. We are affiliated with a development company, and are principally investing preferred JV equity into real assets (real estate projects and buildings). We are developers ourselves. Once we are invested, our incentive is to make you and the project successful. Our main goal is to help you grow your business and become more profitable. We can help with underwriting support, project review, sub-contractor contacts, sales support, etc. We maintain certain controls and management rights.
Do you only invest at the beginning of a project?
It’s most common that we come in at the purchase closing. However we can also invest mid-project, if capital is needed because of a cost overrun or other reason. In these instances we would need to underwrite the project as it currently stands, and then upon completion.
What are typical uses of Preferred Equity?
Developers use our preferred equity investments for many purposes, but here are some of the most common uses:
How quickly can you close?
Our equity investments are a much lighter lift than a loan. If your project is in order, we can close in just a few days.
Do you require tax returns?
Yes.
What size projects do you prefer?
We love projects from 1 unit (i.e., a single family) up through 20 units but are open to reviewing any project. Our partners have invested in projects up to 175 units.
Do you invest in both new construction and renovations?
Yes.
Do you do requisitions/draws?
Some of our investments are structured as a single investment at closing, and some are structured with requisitions based on construction progress. This is primarily driven by the situation and how much construction is being done.
Do you invest in rental projects?
Yes, we can invest in existing stabilized assets, or new construction rental projects. All of our projects require a fixed term so each investment must have a clearly defined exit.
Do you invest in multiple projects per developer?
Yes, once we grow more confident with the developer.
Are your Preferred Equity investments more expensive than debt?
Yes, the preferred equity can be more expensive than debt because equity carries a higher risk. We are paid back after the lender. That said, the preferred equity investment is typically much smaller in size than your loan, so it has a smaller impact on the project P&L.
What do you typically charge for your preferred equity?
Each deal varies, however we typically charge a minimum annualized return, plus a small share of back-end profits, plus an admin / commitment fee.
Does a preferred equity investment your investment incur large legal costs to close?
The legal costs for a preferred equity investment are usually much less than when closing a loan.