SPECIAL REPORT: Joint Venture Equity Providers Have Exited the Market, Say MHW Panelists

By Keat Foong, Executive EditorDenver–Speakers contemplated reduced levels of capital availability at a session addressing equity financing at the Multi-Housing World 2008 Conference and Exhibition, held from Sept. 16 to 19 in Denver. The session, entitled “How to Fund Your Project (II): Finding, Negotiating and Structuring Equity Financing,” was moderated by Brian Ward, managing principal, Big Rock Partners. Panelists at the session said that institutional investors have cut back on providing equity. And while preferred equity and mezzanine capital, as well as private syndication capital, are still available, they are greatly more expensive to obtain. Ward outlined the three types of equity today: institutional joint venture/pari-passu equity (credit companies, life companies, pension fund advisors, private equity funds, banks, Wall Street, GSEs); institutional mezzanine debt and preferred equity (credit companies, life companies, pension fund advisors, private equity funds, banks, Wall Street, GSEs); and private syndication money (friends and family, local and regional money managers and high net-worths). Michael White, managing director at Holliday Fenoglio Fowler, said that much of joint venture equity from institutional investors has been supplied by pensions and life companies. However, pension allocations for such “pari-passu” real estate investments have “dried up” as of last summer. Meanwhile, the pensions are “are not releasing” the money that has already been allocated and not yet spent. Ward said that as far as institutional joint venture/parri passu equity, life companies, GSEs, banks, Wall Street and credit companies are pretty much out of the game. Pension advisors may still be playing, but “not robustly.” Private equity may be in the game still, but they are “looking at really high yields” that may not align with what the market is willing to sell at. Michael Easter, first vice president Debt and Equity Finance, at LJ Melody CB Richard Ellis, said that mezzanine and preferred equity are “more readily available.” Some groups that have provided joint venture equity are moving into mezzanine and private equity space, he said. Life companies, credit companies, some pension advisors and private equity, as well as operators that have their own sources of funds, are getting into the game, he said. However, the downsides to mezzanine and preferred equity are that the investors play lower on the capital stack, and the capital is non-pari passu, that is, the investors have to be paid first before the sponsor gets a share of the profits. White added that mezzanine and preferred equity from life companies go up to 80 percent LTV, and the sponsor has to be a solid operator. Credit companies also provide up to 80 percent of such capital, but the capital “will cost you,” with a yield of 14 percent. Meanwhile, private syndication is the third group of equity that will continue to be a “very significant source of equity” over the next six months, says White. And David Carlson, managing partner of Redwood Capital Partners, said that says the private syndications are more active in the smaller deals of $15 million or so. Ward noted that private syndications have greater financial and regulatory requirements.