Despite the rainy weather, the mood was upbeat at the 2019 IMN Winter Forum on Real Estate Opportunity and Private Fund Investing, held at the Montage Hotel in Laguna Beach, California. Over 1,100 people registered for the event, which according to IMN’s website is:
“Developed by leaders within the commercial real estate (CRE) industry representing the full spectrum of industry participants including funds, developers, LPs, law firms, accounting firms, technology firms and other service providers to the industry, the agenda offers real estate investors a strategic approach to the current regulatory and investment environment.”
Tower Capital had a strong presence at the conference and was represented by its Principal, Kyle McDonough, and Vice-President, George Maravilla. In accordance with the last several years, multifamily remains a favorite asset class among private equity investors while retail is still avoided by many. Despite an overall bullish market outlook, investors are being selective – looking for quality projects, in strong locations, with experienced sponsors – and underwriting remains uncompromised. However, when a project does check all the boxes, some equity investors are willing to stretch a little more than in the recent past by allowing the sponsors to contribute a smaller equity percentage of the total capital stack, and thereby have less “skin in the game.” In recent years, a sponsor (or syndicator) would be required to write a check for at least 10% of the total equity required for the project from their own funds. Under current conditions some investors simply want to see an amount “that is meaningful to the sponsor.” This is because of the ever-increasing amount of capital sitting in funds waiting to be deployed.
Given where we are in the current market cycle, some funds are de-risking by offering mezzanine financing where their position is more secure than straight equity. These capital providers may lend up to 90% of the total capital stack for the project, with pricing as low as 12%. Return expectations have simmered to an extent, with investors accepting returns in the low to mid-teens for existing value-add projects and high-teens to low 20’s for ground up development.
Several funds have been created targeting opportunity zone projects, which have been created to help direct resources to traditionally low-income communities, known as Qualified Opportunity Zones, through a more market-driven approach. Projects situated in these newly designated Opportunity Zones offer a number of financial incentives to long term investors.
If you have are seeking equity financing for a project, or would like to learn more about different equity programs being offered in today’s marketplace, please contact Kyle McDonough or George Maravilla, at Tower Capital.