At A Glance:
| Location: | Greater Houston, TX |
| Transaction Type: | Acquisition |
| Capital Type: | Preferred Equity (Subordinated Debt) |
| Property Type: | 350+ Unit Value-Add Multifamily |
| Total Capitalization: | $73,000,000 |
| Common Equity: | $14,000,000 |
| Preferred Equity: | $7,000,000 (81% LTC) |
| Senior Debt: | $52,000,000 |
The Client
The Client is a vertically integrated multifamily real estate investment firm. With asset management and transaction experience among the principals exceeding $2 billion, collectively, they have built a demonstrated track record of success. The firm has been established for approximately 10 years and manages a portfolio of several thousand multifamily rental units. Historically, syndicating equity from a network of high-net-worth investors has been the primary method of capitalizing equity requirements for the client’s transactions.
The Deal
The targeted multifamily acquisition was well-located within Greater Houston, consisting of over 350 units. Client saw an opportunity to purchase the asset given the limited “affordable” rental options in a market saturated with newer developments requiring higher rents. With significant value-add potential, well over $5MM was budgeted for interior and exterior capital improvements over a large number of buildings in the rental community. One of the challenges that the sponsor faced in the capital markets was a limited availability of senior debt options that would provide the level of financial leverage they needed – at a reasonable cost of capital. As this was a large equity raise for the sponsorship group, obtaining higher debt proceeds would lessen the equity requirement to fund the deal, and increase the internal rate of return (IRR) for the common equity investors.
When Valencia Realty Capital was hired as a capital advisor to arrange competitive, low-cost subordinate debt, an institutional debt fund had already been engaged to provide the senior debt. The Client was already pushing forward with their due diligence on the acquisition.
Our Solution
In order to close the gap that the client had in their $21MM equity raise, Valencia Realty Capital arranged a $7MM preferred equity investor. Combined with the $52MM of first mortgage senior debt, the second-position preferred equity had a last-dollar risk of 81% loan-to-cost. This second position loan was provided on a non-recourse basis.
The subordinate debt arranged by Valencia Realty Capital was approximately half the cost of the projected IRR to LP’s. In addition to being a cheaper alternative to raising LP equity, it also provided significant convenience to the Sponsor by reducing their equity raise.
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 provide you with an alternative to raising expensive, dilutive equity capital, contact us today.
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