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Q4-2022-EQUITY-INSIGHTS-REVIVAL-CAPITAL-SOLUTIONS

Q4 2022 Equity Insights To Finish Strong

As we approach end of year, I know many investors are looking to close deals to take advantage of the last year of 100% bonus depreciation. Below are first-hand insights compiled from speaking with many equity provider partners who write $300k-100M+ checks!

Q4 Equity Insights:

✨ Fixed debt is best (some won’t even look at deals with floating rate)

✨ If floating, most will UW to rate cap for all of yr 1 minimum

✨ Factor in any rate increases expected prior to close

✨ Some equity providers will pass if the lender is difficult to work with

✨ 1980 and newer (basically older you go, the fewer options there are)

✨ For CAP rates, use stabilized market rate from CoStar/ Yardi. For exit, look at historical rates to get an idea of how much they’ve compressed per year (ie, if 5 yr exit, look at cap rates from 5 yrs ago for escalator guidance; most will be 10-15bps/ yr min)

✨ Lower leverage is best for preferred equity

✨ Generally, max LTC will be in the 80-85% range, but there are many other data points equity looks at (“debt” service inclusive of their equity, debt yield, last dollar basis, breakeven occupancy inclusive of equity, etc)

✨ If using higher leverage debt, will likely max out at 80% LTC or less, with lower leverage usually modeling well to 85%

✨ Be in top 100 MSA ideally (roughly MSA of 500k+ people)

✨ 10% sponsor co-invest minimum

✨ If planning less than 5 yr hold, some will model a refi to ensure the ability to take them out without an exit should market conditions warrant such (and they will use current agency guidelines for that takeout)

✨ Be conservative and not overly optimistic (ie reversion cap rates, annual rent growth, vacancy, etc…follow the data unless you have good market intelligence)

✨ Needs to be attractive basis with a solid business plan

✨ If your going-in CAP rate inclusive of CAPEX is at or below market, you should be in a good position

The sweet spot for check sizes is usually in the $4-20M deal size to get the most eyes (do have providers that will write $300k checks, which equates to ~$3M deal, but only a handful of them…same with $100M checks)

Below is an example of some metrics equity groups are interested in:

Q4-Equity-Metrics-Example

Allow me to reevaluate your investment by underwriting with today’s rates and show you how different debt and equity options could maximize your returns and reduce risks in today’s economic climate. 

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