Capital Spotlight – Highlighting featured capital investors. We regularly publish the detailed criteria of our most unique real estate capital sources.
In the current capital markets, sourcing LP equity for construction deals remains a significant challenge, particularly for both established sponsors and emerging managers. This difficulty is magnified when the LP equity requirement falls below a $20MM check size. Recognizing this gap, Valencia Realty Capital (“VRC”) has actively pursued new capital relationships to address the needs of small to middle-market real estate investors and developers.
Recently, VRC had the opportunity to interview a promising capital relationship specializing in deploying $2-15MM participating preferred equity investments for heavy value-add and ground-up construction projects. Operating primarily in the Tri-state, Mid-Atlantic, and robust Southeast and Texas markets, this investor distinguishes itself through its innovative approach to investment structures.
While offering a traditional preferred equity product, this capital source emphasizes a pref/LP hybrid investment structure. Typically providing between 50% to 80% of the required equity, akin to a typical LP source, they prioritize flexibility. In exchange, they expect a genuine preferred return plus the return of their principal investment before any sponsor capital recapture—a feature uncommon in today’s market. They are typically solving for an all-in IRR in the high-teens to low-twenties.
What sets this capital source apart is its extensive experience in ownership and development across various asset classes, including multifamily, industrial, and self-storage. This background instills confidence in assuming a higher last-dollar position in the capital stack for heavy value-add and construction deals. Moreover, the group demonstrates flexibility regarding exit strategies, acknowledging the uncertainty of the current market environment. While adhering to a traditional 18–36-month term, they are open to extending their investment horizon if necessary.
If you are an experienced or emerging real estate developer seeking $2-15MM for an industrial, multifamily, or self-storage project, we invite you to contact us. Together, we can expedite the process and provide you with a tailored quote to meet your needs.
Capital Type | Participating Preferred Equity |
Geography | Tri-state Area, Mid-Atlantic, Strong South East Markets and Texas Markets |
Property Types | Multifamily, Industrial, Retail, Self Storage, NNN |
Vintage (multifamily) | 80’s or later subject to market |
Use of Funds | Acquisition and Construction |
Construction | Ground Up and Heavy Renovation ** Investor is targeting heavy value creation |
Sponsorship | Preferring partnerships with established local sponsors experienced in the subject asset class. Ideally, sponsors have at least 1-2 transactions of similar deal experience. |
Check Size | $2MM – $15MM |
Investment Contribution | 50/50 up to 80/20 of required equity |
Target Returns | 16% – 22% IRR (subject to asset class, deal profile, market, sponsor experience) |
Waterfall | (1st) 11-12% Preferred Return (including return of principal), (2nd) Sponsor catch up to an 11-12% return (including Sponsor’s return of principal), (3rd) Negotiated Profit Participation |
Senior Loan Requirements | Typically like to see moderate bank leverage (70% or less LTC). Willing to structure behind Fannie and Freddie Agency loans |
Target Min Multiple | 1.6 – 1.8x |
Typical Hold Period | 18-36 months (*Willing to allow “tails” on deals for situations where refinance proceeds do not offer a complete takeout of investor’s capital account) |
Focused Underwriting Metrics | Yield on Cost – Asset class dependent. 100 – 200bps targeted spread between stabilized yield on cost and exit cap rate. |
Timeline to a Term Sheet | Typically, 1-2 weeks |
Closing Time Frame | 45-60 days (subject to deal profile and check size) |
If this capital source may be of interest, book a call to discuss a potential capital arrangement.
Read our last Capital Spotlight: Retro Returns: LP Investor Unlocking Value in 1970s-Era Multifamily Investments