Currently working on a deal where the sponsor is putting in 5% of the required equity. The 95% is coming from a pension fund. The sponsor has listed an acquisition fee in the loan amount. The package states that the sponsor will consider the fee to be used as the 5% equity portion. Is this something that others have seen before? Would a lender care that the sponsor is not putting anything upfront technically even if the pension fund doesn't care?
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Are you're buying a senior position in the deal (pref equity, mezz, or sr debt)?
I have heard of people financing fees. So instead of having the pension fund write a check to the sponsor, the fee is included in the loan amount.
Good point, what type of position is it? My comment might not be relevant. I was looking at it from the asset level with an LP/GP structure on the equity side.
Yes, I've a few deals like this before.
A lot of the time though its "developers" who are strapped for cash and don't have a balance sheet. I view this deals as a brokers who are trying to be developers but not taking any risk.
Instead of taking a broker fee upfront they are taking in the form of equity in the deal which isn't realized until the resale or recap.
Personally as well as at my shop we would never look at somebody to lead a deal who didn't have skin in the game. We did one deal with the structure you mentioned but we are lead on the deal, meaning we are running the whole show; construction, accounting, structuring debt, marketing, leasing etc. The "broker" is just riding on our coats tails and has no real power, but does get a small share of the up side which is capped at a fixed percentage. It all comes down to who is managing member and running the day to day.
Also looking at it from a LP/GP level as well. We're currently advising the fund on a portfolio acquisition (not related to this), but I saw this deal in their pipeline and was curious. It raised some eyebrows here and I think they are going to go back and see if they can put in about half their required equity (2.5%) and the other half be in the deferred loan fee.
I mean't acquisition fee, not loan fee.
Got it. Yeah, its really odd when a sponsor puts up zero cash up front. Just basic logic here, why do a deal with somebody whose only downside is the the status quo. Plus I assume they are getting a management fee as well...
It certainly is not common for a GP to put up 0 cash, but I have seen it done.
Why would somebody do this? Many reasons. Maybe the GP has a relationship with the seller, and the property / land is not on the market. This GP is the linchpin in making this deal happen. Maybe the GP does not have cash to contribute, and instead he offers his work pro bono in exchange for a promote within the project.I have even worked on a deal where the LP wanted to be the sole equity contributor (they wanted control in the deal, and this was the only way they would be willing to jump on board).
Yes, having skin in the game will incentivize the developer, but there is all sorts of ways to structure the deal to ensure the developer will give it his all. Having a waterfall with different tiers is clearly a no-brainer, but you can also structure the deal with success fees (successful completion of entitlements, successful completion of signing tenants, successful completion of construction redevelopment).
Yea and the weird thing is these guys aren't a major fund. I think they might end up trying to provide some of the equity portion up front, but the remaining will come through loan proceeds.
We don't finance acquisition fees in my shop. My credit team would look at that as BS equity, shmequity, you name it. I just wouldn't call it equity. We're very focused on sponsors having real money at stake, though.
during the good ol days of development before 2007, deals would get cranked out where the developers fee is assumed as equity in 95 /5 upfront equity split. not sure about current cycle, i got out of real estate and currently trying to get back in! SO FREAKIGN DIFFICULT!!
That is an aggressive structure. I have been pitched similar structures (from sponsors looking for JV or preferred equity from me) but our shop would never do them unless the deal was incredibly compelling. Like other have said, need to see real sponsor equity in the deal.
Would a first lien lender care? These days, I highly doubt a CMBS lender would, but can't say for certain as I've never put a deal like this in front of a lender.
95/5 equity deals are not market - how did they get this deal? It's pretty ridiculous. There are a few deals that I've seen where the sponsor will contribute the land at a marked-up basis and use that as their equity contribution, but those guys at least have some money at stake because they bought the land in the first place. Are these guys getting a promote?
what do you consider market for a normal GP / LP structure? Not something where the GP gets their equity in exchange for an acquisition fee, because that is absurd. I have seen where an LP will allow $0 in capital contribution in exchange for promote only, but nothing pari passu / equity.
I've seen this type, as well, but never did one. Echo the sentiments here. I'd imagine that this must be a tremendous opportunity to be even remotely taken seriously.
Promote is 75/25. Deal is an office in Austin, TX.
This isn't happening in my office. We've got a mixed use deal going and we've got the deal in a 90/10 structure. That's with 5% deferred equity not being included as equity. So I'd guess you would call it 15% equity, but at the same time, that deferred equity isn't real until the sale, which at that time, we're paid off. So it's never in the deal in our opinion.
Yea I was considering they do this. They put in 5% and defer an additional 5% as deferred equity from the acquisition fee, atleast this way they do a 90/10 structure.
I've seen this type, yes, not that uncommon. If the Investor is comfortable with the Developer not having its own equity, then the deal is doable and the banks should be alright with it. In practice, by transferring the acquisition fee into equity rather than an immediate payment to the developer, the investor could be seen as helping to facilitate alignment of interest. I work at a shop that does a lot of development deals, and rather than a promote for the developer, sometimes we'll just give them an outsized equity stake (or if they contribute the land you mark the land up at the time of your entry). Say they put in 20%, we'll give them 25% of the equity. In a way this is a better strategy for matching up interests between parties then the promote, because the developer is not forced to try and hit some hurdle rate ...(they will theoretically have a view of risk/return that is close to the major principal investor, as both parties see the same pro-rata payout at each scenario).
It seems like the "sponsor" is really pitching itself as the operator of this deal, putting in only sweat equity in exchange for an equity stake/ promote. This is a bit similar to the role Crown Acquisitions played in the 666 5th Avenue acquisition a few years ago. Granted Austin is not Midtown Manhattan but the operator may have unique access/below market price and other unique insights into this particular property/submarket that justifies this. I know Austin is kind of a quirky town for TX as reflected in its zoning and land uses. Is there something unique or special about the property in question or its location that gives teh sponsor a unique edge?
http://therealdeal.com/issues_articles/a-666-fifth-scorecard/
There is really nothing special about it. Acquisition price is more less at market. Sponsor isn't even a major fund and their balance sheet cash is limited. Would 5% equity contribution + 5% deferred equity be a better structure? Thoughts?
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