What's the cheapest cost of capital in the market? Cost of capital essentially drives deal flow so I am curious to hear who has the cheapest capital out there.
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Alot of the pension funds that extremely low cost of capital. Not sure on specifics, but I know OhioSTRs, CALSTRs, and TRS of Texas are extremely low.
I think he's referring to cheapest of of capital as in Self Funding, Debt, or Equity raises, correct?
That's right. I am most interested in knowing equity sources but debt could be interesting as well.
A couple thoughts:
High net worth investors seeking capital preservation (ROC) above all else. These are your billionaires who beat out institutional funds/developers on brokered asset/land sales simply because their view is so long that they don’t have an IRR or multiple they need to hit within 10-15 years. They can buy for a 50 year hold knowing their children and grandchildren will benefit from their investments.
Also—foreign pensions and state investment authorities, namely in markets where interest rates are negative or near zero. I’ve heard they are simply looking to get their money back vs. outsized returns, and so I would think if you can align yourself with that capital source it could be the best out there. I’m not sure how OFAC/foreign investment regulations impact bringing that capital in and out of the USA though.
The only problem with foreign capital is FIRPTA which requires a foreign LP company to form a JV with a US-domiciled LP. They could not be majority owner so the US company would be 51% owner while the foreign company would take the 49%.
Problem with billionaire families is that they want all of the control. For example, selling whenever they want, even if it is the wrong time.
Can't they just create a new LLC in USA and do the JV with that?
FIRPTA is a withholding tax penalty for cap gains on a foreign seller, has nothing to do with foreign entities ability to hold US real estate. We have several EB5 funds where the JV LLC is majority owned by the EB5 members while the minority interest is held by the member-manager a US entity, and we are comfortable with the KYC provisions.
Cheapest cost of capital I'd say is also EB5 in CRE, since the green card visa consideration given to the ivnestor greatly reduces the return on their investment, most just want capital preservation so interest rate on EB5 non-recourse mezz can even be 1%
This is spot on. A good rule of thumb to use is that the cost of capital will generally mirror the return profiles of the deals an investor class will look at. For example, a private equity firm may have a REPE fund/arm, which in many cases will primarily focus on value-add/opportunistic deals direct (higher return profiles).
Their returns if they are investing as the LP will also be on the higher side. A REIT or pension fund will typically chase core/core-plus deals direct (lower return profiles), and you can expect (to a certain degree) they'd behave the same as the LP.
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Generally speaking, pension capital is the lowest. In my experience, value-add/core-plus prefs are in the mid-single digits.
Foreign capital, particularly Asian, would be a very close second.
Third would be insurance groups.
Getting back to my HNW comment and your mention of IRR hurdles, HNW’s in my experience are predominantly focused on equity multiple and ROC structures. This is why I would say these groups are cheaper relatively speaking than your IRR focused investors. The ideal structure with a group like this is longer term hold—overpaying today for land (and having a ROC structure) and executing the project over 5, 10, even 15 years can still yield extraordinary results for the sponsor given there is no IRR clock the sponsor is fighting.
I would agree with ThatGuy as well on the pensions and Asian capital. These groups may be able to structure with prefs so low that hold period is less impactful.
Again, Investors from sovereigns with negative or zero interest rates and low growth at home (Think: Japan).
Also, investors deploying capital for a tax shield in depreciating assets.
What was said about UHNW individuals, foreign capital, and pension funds above is correct. Generally speaking, those groups are most inclined to protect their capital above all else, even if it means taking a haircut on returns.
Regardless of the capital source, try and find shops that would kill to finance your deal. You can get incredible financing terms from lesser known players because you're giving them a shot to finance a deal that you could’ve given to any of your usual financing partners and they would've never had the chance
Cheapest cost of debt are senior loans. Cheapest senior debt in America comes from GSE's with many varieties of loans between 3-4% interest.
Cheapest cost of equity comes from a variety of players including pension funds, sovereign wealth funds, and life insurance companies acquiring core assets.
I’m surprised to hear people say pensions are the cheapest cost of capital. I’d think they’d have decent negotiating leverage as an LP based on the sheer size of their checks.
Depends on what amount of money you're raising. If you need $25mm of equity, there are a lot of ways to get there. There just aren't that many $500mm+ jobs that need nine figures of equity. If you're looking for that, sure, the more limited world of LPs available will have more leverage.
Part of cost of capital depends upon what type of asset. Pension Funds and Life Cos are not going to invest typically in riskier assets, and thus don't demand a premium.
Theoretically, the dude who won $700+ million jackpot should have the cheapest cost of capital.
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