At A Glance

LocationCoastal South Carolina
Transaction TypeValue-Add Acquisition
Capital StructuredPrivate Senior Bridge Debt & Co-GP Equity
Property TypeMultifamily (Workforce Housing)
VintageLate 1970’s
Number of units / Property Size100± Units
Total Capitalization$16,500,000*
GP Equity$1,000,000*
LP Equity$1,500,000*
Senior Debt$14,000,000* (Private Lender)
Leverage85% Loan-to-Cost*

*Approximate figures

Project Background

An experienced Northeast-based multifamily owner-operator expanding their portfolio in the Southeast U.S. region, with a mandate for strong-yielding opportunities to offset the current high-interest rate environment, had been tracking the subject deal throughout the turbulent market of 2023. After the seller was able to stabilize rents to 90%± of the asset’s potential, the Sponsor secured control of the asset at an attractive basis under purchase and sale agreement. The Sponsor’s original plan to finance the acquisition with their agency lender presented challenges given the current market interest rates and debt service constraints. It soon became clear that a higher leverage capital structure was required to help bridge the gap between the senior agency loan, which the Sponsor had already sourced, and equity capital that they had allocated for the deal.

It was at that point that the Sponsor engaged Valencia Realty Capital (“VRC”) to source a preferred equity partner for their business plan. Upon engagement, VRC was able to quickly match a qualified investor relationship to fund preferred equity behind the Sponsor’s agency lender. During the due diligence and closing process, given the volatile insurance and interest rate market, it became apparent that the agency lender was coming in lower on proceeds than had originally been discussed. This change disrupted the cash flow pro forma of the deal and, ultimately, the required equity proceeds to close. VRC swiftly modified the financing strategy to a “senior-stretch” bridge loan at 85% of cost that was able to close in a sub 30-day time-frame. The senior stretch solution not only simplified the capital stack, but was accretive from a pricing standpoint, as it offered an interest rate that was attractive as compared to other private options.

The South Carolina opportunity brought many unique challenges to the table. For starters, the asset location was too tertiary for many national lenders thereby narrowing the prospective capital source pool. Secondly, many lenders these days are shying away from 1970’s and 1980’s vintages, limiting the capital pool even further. Additionally, the deal had many dynamic variables, including an active LP equity syndication, a challenging insurance environment, a time-sensitive seller, and a key co-sponsor that did not want any personal recourse from the senior debt. All of that said, VRC stuck to its initiative of working with high-quality sponsorship with substantial operating and market experience. VRC has found that this core focus allows its capital sources that remain active with these previously stated hurdles to get comfortable with such investment conditions.

With these dynamics, the opportunity arose for VRC to provide a $500,000 minority co-GP investment through its high-net worth investment vehicle. The structure also offered an additional loan signatory, providing a credit enhancement to the senior debt.

Role of VRC

VRC’s involvement in this deal was multifaceted. VRC was originally engaged to provide a full underwriting analysis of the opportunity and introduce preferred equity sources. Given the fact that we had already underwritten the deal, when the situation caused for a changed of plans, VRC was able to quickly adjust the financing strategy and leverage a close relationship with a national private senior lender with whom VRC had closed many deals in the past. Once the term sheet was signed, VRC assisted the sponsor and lender in closing the transaction in a timely and efficient manner.

Financing Structure

The total capitalization of the deal was approximately $16.5MM. VRC arranged approximately 85% LTC in senior debt from the New England based private lender. The remaining capital came in the form of equity, which amounted to $2.5MM± from the sponsorship group and LPs. Given the level of leverage provided, the senior debt terms were attractive, including a WSJ Prime + 2.25% rate, 2 ½ year term with no pre-payment penalty, and recourse to core sponsorship team with non-recourse guarantees from other sponsors.

Adding ValueStructured finance co-gp private bridge debt

From this case study, we gain insightful perspectives into the intricacies of multifamily real estate financing in today’s capital markets. Key takeaways include A) The importance of thorough and adaptive communication strategies among all involved parties, crucial for navigating complex transactions and B) The need for back-up options and strong capital relationships to navigate dynamic market conditions.

By continuously canvasing the market for active capital sources and staying up to date on their current investment criteria, VRC is able to predict and navigate sensitive deal topics up front. This also allows VRC to be nimble in our ability to quickly identify the right capital sources. This market knowledge combined with an in-depth underwriting and due diligence process allows VRC to deliver maximum value to our clients and the capital relationships that we work with.

Valencia Realty Capital’s role in this transaction highlights our dedication to providing comprehensive solutions in challenging commercial real estate scenarios. Our ability to manage a variety of moving parts, from senior debt to preferred equity and navigation of complex legal structures, demonstrates our commitment to achieving clients’ objectives. This case study highlights our expertise in turning potential challenges into opportunities, ensuring our clients not only meet but exceed their financial and operational goals in the commercial real estate sector.

To learn how Valencia Realty Capital can help to increase leverage and provide gap equity financing, contact us today.

Read our last Case Study: $26MM Structured Financing for Industrial-Flex Acquisition in North Carolina

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 including approximations of financial figures. 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.