Letter of Intent - Filling the Capital Stack on Development

Post-recession, senior debt is easier to come by, ranging from as low as 60% through a normal high of 75%, but how can intermediaries and advisors protect their clients' funds while maximizing their returns? In the past, equity partners have been the only real answer. The issue that sponsors have with equity is its expensive and all too often, it calls the shots. As they say, money talks. Between the preferred returns and the waterfall, the sponsors have severely decreased their potential returns, while losing a certain level of control in their creative process. Berko & Associates' finance & capital markets team has recently structured a number of transactions with an 85%+ loan-to-cost. Filling the capital stack with debt allows the sponsor to bring in far less (potentially zero) equity partners, and they get to manage 100% of the project. Of course there are drawbacks as well, but as we've seen in recent months, maintaining 100% of the equity in a project and capitalizing much more so on the tail-end has been well worth the added risk. Why not pay 10% debt and be done instead of an 8% preferred return and 50%(ish) of the projects' returns? It's a question that we are beginning to answer, and 85% is just the tip of the iceberg. For homerun projects, we have sourced debt upwards of 92.5% of the total project cost, thereby giving the borrower far more debt than the purchase price of the property. It's a new avenue to take when equity becomes scarce on certain projects. Given, it's sometimes more efficient to use someone else's money than your own, successful developers with strong track records have been able to secure optimal financing without the need to give away chunks of profit. Lee Silpe is the senior analyst at Berko & Associates, New York, N.Y.