At A Glance:

Location:Boston Area, MA
Transaction Type:Development
Capital Type:Crossed Preferred Equity
Property Type: 50+ Unit Condominium Building with Ground-Floor Retail
Total Capitalization:$45,100,000
Common Equity:$4,500,000
Preferred Equity:
$2,600,000 (90% LTC)
Seller Mezzanine:$3,300,000
Senior Debt:$34,700,000

The Client

Valencia Realty Capital (“Valencia”) was introduced to the client by a trusted referral partner. The Client is a seasoned real estate owner, developer and operator of multifamily and commercial properties in Boston with a substantial real estate portfolio, and considerable illiquid real estate-based net worth.

The Deal

Client had already acquired a half-acre developable parcel located in a strong neighborhood of Boston. Prior to engaging Valencia, the Sponsor had permitted and approved the 50+ unit condominium project, and had lined up senior debt from a trusted banking relationship. The bank was open to having a preferred equity investor take a third position, with “debt-like” interest in the property, behind the bank in first position, and the seller’s carried-back note in second position.

Between the equity and debt capital lined up and the $45.1MM total capitalization, there remained a $2.6MM gap in the Sponsor’s capital stack. In terms of timeline, the client had required a conventional 45-day to 60-day closing time frame.

Our Solution

2.6MM-Preferred-Equity-for-45.1MM-Condominium-Development-Case-StudyIn order to close the gap that the client had in their $7.1MM equity raise, Valencia arranged a $2.6MM preferred equity investor. Combined with the $34.7MM first mortgage loan, and the $3.3MM second-position mezzanine loan from the seller, Valencia’s preferred equity investor had a last-dollar risk of 90% loan-to-cost and 77% LTV on an as-complete basis. This “debt-like” preferred equity required soft pledges structured on equity positions in the client’s portfolio, which were designed to be non-disruptive to any of the Sponsor’s in-place loan covenants or partnership arrangements. The recourse was limited to this “soft pledge” structure and standard carve outs. See our Capital Spotlight for more details on this capital source.

The interest rate on the preferred equity capital was 16% per annum over a 3-year term. 8% of the capital was paid on a current monthly basis, while the remaining 8% accrued to maturity. With an interest rate on the bank’s loan of approximately 8.50%, based on WSJ Prime index rate, and seller mezzanine at ~12%, the blended cost of capital for the combined debt structure was approximately 9.26% at 90% leverage on a loan-to-cost (LTC) basis.

The Sponsor’s original plan to fill the equity gap was to raise limited partnership equity capital from high-net worth investors requiring returns of over 20% per annum. Comparatively, Valencia’s preferred equity investor only required a fixed return of 16%, which served as an attractive alternative to the more expensive and dilutive LP equity capital from high-net worth investors.

The Sponsor had a high conviction in the project and was comfortable accepting the higher leverage in exchange for the lower cost of capital. 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 for a deal like this, a private “senior stretch” lender would have charged north of 10% interest, and would have provided substantially lower proceeds from a loan-to-cost standpoint (75-80% LTC.)


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 development plan, which made for a great project.

To learn how Valencia Realty Capital can help to unlock your trapped equity, contact us today.

Read our last Case Study: $7MM Preferred Equity for $73MM Multifamily Acquisition

Disclaimer: This article is written as a “high-level” overview to illustrate a real-life deal example for educational purposes only. In order to preserve the confidentiality of the Parties involved in this transaction, some identifiable information has been modified slightly. Please do not construe this article as legal, tax or financial advice. As all situations are unique and nuanced, be sure to seek the counsel of qualified professionals before making any investment or financial decisions.