At A Glance:
| Location: | Boston Area, Massachusetts |
| Transaction Type: | Acquisition |
| Capital Type: | $2,400,000 Preferred Equity |
| Property Type: | Value-Add Office Building |
| Total Capitalization: | $23,100,000 |
| Common Equity: | $3,000,000 |
| Preferred Equity: | $2,400,000 (87% LTC) |
| Senior Debt: | $17,700,000 |
The Client
Valencia Realty Capital (“Valencia”) was originally introduced to the client in 2017 by a mutual contact. The client is a 20-year seasoned real estate owner, developer, and operator in the Greater Boston communities with a portfolio exceeding 100 properties, and an ultra-high net worth based in illiquid real estate. After 5 years of knowing the client, Valencia was pleased to have the opportunity to help them capitalize a great acquisition opportunity.
The Deal
Client had entered a purchase & sale agreement to acquire a 100,000+ SF office building in a strong Boston submarket with convenient access to the MBTA Red Line. Prior to engaging Valencia, the Sponsor had already lined up senior debt from a trusted banking relationship. The bank was open to having a preferred equity investor take a second position “debt-like” interest in the venture. Of the total $23.1MM capitalization, over $4.0MM was budgeted for the capital reserves, tenant improvements, and leasing commissions required to execute a substantial value-add plan of the office property. The $5.4MM total equity requirement was partially raised, and the client was interested in higher leverage than the bank would provide. Client had required a conventional 45- to 60-day closing timeframe.
Our Solution
In order to close the gap that the client had in their $5.4MM equity raise, Valencia arranged a $2.4MM preferred equity investor. Combined with the $17.7MM of senior debt, the second-position preferred equity had a last-dollar risk of 87% loan-to-cost, and less than 80% LTV on an as-stabilized basis. This second-position loan required limited guarantees focused on select equity positions in the client’s portfolio but was technically non-recourse outside of these guarantees. See our Capital Spotlight for more details on this capital source.
The interest rate on the preferred equity capital was fully accruing at 15% per annum over a 2-year term, extendable to 3 years. With an interest rate on the bank’s loan of approximately 5.4%, the blended interest rate of the combined debt structure was approximately 6.55% — at 87% leverage.
While the 15% rate of the preferred equity may seem like expensive debt, the client’s cost of equity was substantially higher, and the sponsor had a high conviction in the project. Furthermore, by combining bank debt with the preferred equity, it provided the client with a customized debt structure that is substantially cheaper than rates offered by private debt funds. By Valencia’s estimation, a private “senior stretch” lender, at the same level of leverage, would have charged 8.00% interest, or higher, for a deal like this.
Results
The client was able to achieve the high leverage that they desired at a cost of capital that made sense. Valencia efficiently matched the client with the capital they needed to follow through with a compelling value add plan on a great deal.
To learn how Valencia Realty Capital can help to unlock your trapped equity, contact us today.
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