Balance Sheet Enhancement - What's it worth?

Assuming that raising equity capital was not an issue, but needing a guarantor for non recourse financing (minimum net worth and liquidity), how would you approach valuing that piece of the deal? Assuming it would come in the form of a piece of the promote? Anything else? This guarantor would not be putting any capital in, simply signing on the carve outs.

Comments (19)

Apr 10, 2018

I'm not sure there is really a market for this kind of thing. I'm not saying that people out there aren't willing to do this for a certain price, but I don't think there is a programmatic approach to this.

I'd say the person signing these carve out would want more than a share of the promote. What happens if the deal goes bad? What can they extract from you if you do something that exposes their balance sheet? I'd assume at a minimum you'd need to pledge your interest in the deal (assuming you have skin in the game) and share part of the promote. I know some people have created a "balance sheet fee" to entice someone to sign for the carve outs.

Definitely curious to hear other's thoughts here.

    • 1
Apr 10, 2018

Ranges, but I've heard 3% up front to 1% annually. More expensive than it really should be. I believe there was a conversation about this in the forums a month or so ago.

I'm surprised there isn't an insurance policy for this essentially. Gerald Hines was able to get 100% loans with $500 in the bank in the 80's but even on low leverage non-recourse stuff they still expect a decent balance sheet from Borrowers. If there is a platform like this out there I think it could do really well in the $2M-$30M deal range

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Apr 10, 2018

I know a very wealthy family that does this. They charge something like 3-5% upfront fee to guaranty a deal. There's a market for this, though it's not huge.

Apr 10, 2018
Troll - Aged 18 Years:

I know a very wealthy family that does this. They charge something like 3-5% upfront fee to guaranty a deal. There's a market for this, though it's not huge.

What type of deals would they do this for? And, what type of group would they do this for? I imagine that an institutional group would not have a need for this service as much as a small developer or a family office.

Apr 10, 2018

I saw them working on single-family residential developments for smaller homebuilders (small, as in $1-2M credit lines).

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Apr 11, 2018

Dumb question, what is the upfront fee applied to? The total debt amount?

Apr 10, 2018
Surfing Pirate:

Dumb question, what is the upfront fee applied to? The total debt amount?

Yeah, the total amount being guarantied.

May 8, 2018
real_Skankhunt42:

I know a very wealthy family that does this. They charge something like 3-5% upfront fee to guaranty a deal. There's a market for this, though it's not huge.

is the 3-5% fee rolled into the TDC? i.e. is it a portion of the budget used to capitalize the project?

Apr 10, 2018
Link_REDev:
real_Skankhunt42:

I know a very wealthy family that does this. They charge something like 3-5% upfront fee to guaranty a deal. There's a market for this, though it's not huge.

is the 3-5% fee rolled into the TDC? i.e. is it a portion of the budget used to capitalize the project?

From what I recall in the specific case that I saw, the borrower paid the credit enhancer in cash and the bank did not consider it part of the total costs of the project (with regard to calculating LTC/LTV).

Apr 10, 2018

I have seen 2-6% upfront

Apr 10, 2018

6% upfront for a guarantee on non-recourse product. Anyone want to raise a fund to do this?

May 2, 2018

6% just for a guarantee?! And they aren't even going to fund the equity, just "promising" it's there?

May 2, 2018

Does anyone know for sure there isn't an insurance product out there for this? I know Lloyd's was pretty exotic in guaranteeing EB-5 paybacks to investors.

Would be interesting to see if anyone has any thoughts on this

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Apr 10, 2018

They do exist, but who and the pricing I'm not so sure about.

May 9, 2018

If anyone knows someone specificly I have a live deal right now that could use this. PM me

May 2, 2018

likewise

May 24, 2018
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