In commercial real estate deal making, from development to acquisitions, the tough part of any project is closing out the financing by securing that equity piece.
It can be a long, daunting and expensive task, and in a lot of cases, not securing that final 30 to 35% can stop a deal in its tracks. Sometimes for good. This has always been the underlying dilemma for real estate developers and investors, small and large, and with the banks having pulled back their loan-to-cost/loan-to-value (LTC/LTV) lending percentages far below what they were pre-pandemic, it has only made matters worse.
Real estate sponsors are now being asked to come to the closing table with more cash, depleting their coffers and, more importantly, depleting their overall returns. However, that will soon change, said Mark McClure, managing partner of GenX Lending, a division of GenX Capital Partners, LLC.
“With the exception of last year, which was slow for everyone, we would close on average over $100 million a year in debt and equity financing for seasoned real estate developers and entrepreneurs,” said McClure. “And many times, for our clients the equity component to close a deal has been a hurdle.”
McClure said GenX Lending is also finding this to be true in smaller, hard money deals they are financing in Maine and New England.
“Anyone can offer 65% bridge or hard money financing. It’s that other 35% that helps make the deal happen for the developer, which is a problem we are now able to help solve with this new structure.”
GenX Lending will not only lend the 70 to 80% of the funds needed to acquire and develop, but if the deal makes sense to them, they will sign on as a partner to provide that last chunk of remaining capital needed to close. That amounts to what is typically 90 to 95% of the total capital stack.
“That allows the real estate sponsor to leverage their capital, juice returns and have enough dry powder left over to do more deals,” said McClure.
Under this financing structure, GenX Lending eliminates the need for borrowers to secure an expensive equity partner that could be looking for returns of 15% or more on their invested funds, plus a piece of the backend, which can run as high as a 50/50 split. The equity partner would keep these profits and control of the deal on their side of the equation.
“Essentially, we are bringing a first position loan at one rate and then partnering up for the balance of the financing, giving a disproportionate piece of the return in the sponsor’s favor,” said McClure.
For example, GenX Lending recently completed a deal where they came in with 75% LTC, leaving $250,000 balance needed to close. Their fund partnered with the developer by bringing the financing to 95% LTC ($200,000 of the $250,000 balance) and the sponsor came in with 5% ($50,000).
“We agreed to split the profits 60/40 in the sponsors favor,” McClure said. “But they were not to take any fees out of the project and thus contribute that as sweat equity, with profits not to be realized until the asset was sold, which they gladly accepted.”
In the end, according to McClure, the borrower had control of the project, a loan term with ample time to finish paying it back, quick requisitions for their draw requests and both sides realized outsized returns.
“It was a win-win for everyone” McClure added. “And last I checked there are not many bridge lenders out there offering this. Certainly not in New England, Maine especially.”
To get your project financed or for more information call 305-507-6777, go to GenX-Lending.com or email Loans@GenX-Lending.com
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