Question about REPE funds and how much debt they use. Lets say they raise $300m, does that mean they will typically borrow another $100m or more for projects and investments? What amount of debt do they borrow and how frequent is it?
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Fairly often, debt is a critical part of the cap stack for any deal in real estate, it would be extremely rare to see a pure equity play if they even occur at all.
Most will seek up to the maximum that lenders feel comfortable giving on a property which differs by the sponsor, property, financing structure, etc.
50-75 percent is the range you'll see with experienced operators like brookfield, SL Green, etc. working on a portfolio of class A multifamily/office in a metropolitan center able to hit those higher leverage ratios.
You see it a lot with core ODCE funds.
I have worked at a couple of different value-add firms that target 70% LTV. Depending on the existing debt or opportunity type, a deal may start out at 60-65% LTV upfront so we work with banks to create facilities to boost underlevered assets to 70%.
There are also fund level facilities/sublines that are used to further lever individual deals or close quickly while looking for asset-level debt.
no, they would riase 100mn and borrow 300mn
then if they're real pigs they charge a recurring fee off the total cost (400)
Thanks brother. For example if a fund delivered a 15% return is that on both debt and equity or equity only?
Usually if a fund has a benchmark target of 15%, that represents levered returns unless stated otherwise (otherwise they'd be doing very few deals).
Definitely equity only. I'm hard pressed to think of a scenario where unlevered returns would be described.
This industry's addicted to leverage!
Most funds I have seen have been in the 60-70% leverage range.
It depends on the fund. An opportunity fund may target 65%-75% leverage, but keep in mind those deals (opportunistic$ are harder to finance. So you may actually get less leverage because the banks won’t bring you up to your target. I’ve also seen core funds with a target of 50% leverage. It depends all on mandate.
Currently interning at a family office in the midst of raising their first fund. Value add focus across mainly retail assets in a primary market. $150M total - $100M of which is debt (67% LTV).
Larger funds also leverage their equity commitments through subscription financing or warehouse lines of credit. this allows them to acquire an asset using 100% leverage then call the equity from investors after the the deal closes. They can move faster on a deal this way because they don't have to wait for the equity call to come in. It also boosts their IRR because the equity capital isn't deployed as long. So the capital stack on a deal would be 60-70% traditional financing with the remaining 30-40% financing coming from the subscription line to be paid off shortly after closing.
I'll add here that "shortly after closing" can mean a lot of different things, and firms will hold money on the subline as long is as legally allowable in their documents.
One million dollars.
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