How to use structured financing to maximize capital formation efforts

Many real estate sponsors view capital formation as the last peice of the transaction to worry about. It is our opinion that a project will come together much better if capital formation drives the deal, rather than the deal driving the capital formation.

Understanding how to maximize the use of all levels of the capital structure through the use of structured financing when financially engineering your next transaction will help you create a successful project. The following items are just a few of the benefits of understanding how to engineer the right capital structure:

1. Use all levels of the capital structure to move up the leverage curve: By using the proper combination of senior debt, subordinated debt and third party equity it is possible to realize leverage well in excess of 90% of total project cost while maintaining control of the investment.
2. Use different levels of the capital structure to prevent project ownership dilution: By using mezzanine financing to fill as much of the equity gap as possible you will lower your overall cost of capital while not being forced to give up as much ownership in the project as you would by closing the entire equity gap with a joint venture equity partner.
3. Negotiating the proper type of equity joint venture can be critical to the financial success of a project: If you move up the leverage curve with the proper combination of senior and subordinate debt the amount of equity needed from outside investors is minimized. Using the right pari-passu, or preferred equity investment structure can leverage the sponsor co-invest to as little as 2% -5% of the project equity requirment while still leaving them with the majority of project ownership.

More information on how to design the proper capital structure is available from Pacific Security Capital.

Authored by Mike Myatt
Executive Managing Director of Pacific Security Capital
Contact Pacific Security Capital today 1-800-844-6085