Gap Financing: Bridging the Capital Stack
Is your commercial real estate project facing a capital gap between the amount of senior debt you can raise and your available equity? Do you need additional funding to close your deal or complete your development, but aren’t sure where to turn?
NetLeaseX Capital: Your Partner in Structuring Gap Financing
As a specialist in structuring gap financing, NetLeaseX Capital has significant experience helping real estate investors and developers, commonly known as sponsors, raise preferred equity, mezzanine debt, and co-GP capital from our network of sophisticated investors. We understand how to creatively fill the space in the capital stack between senior debt and common equity, providing increased leverage while still protecting the sponsor’s ownership and upside.
Understanding the Capital Stack
The capital stack illustration shows the relative risk and return of each level of capital invested in a sponsor’s project. Senior debt has the highest priority of repayment with the lowest expected return, followed by mezzanine debt, then preferred equity, and finally the sponsor’s common equity. All distributable cash flow is paid first to the preferred equity investor, then to the sponsor. If a project also has co-GP capital, the co-GP investor would be paid after the preferred equity investor but before the sponsor, reducing the sponsor’s overall equity contribution.
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Types of Gap Financing
Sponsors can increase project leverage by raising various forms of subordinate or gap financing. This type of financing “fills the gap” between the senior debt and the sponsor’s equity. The three main types of gap financing are:
- Mezzanine Loans: Sponsors pledge their membership interest in the borrowing entity to secure repayment, rather than granting a mortgage.
- Preferred Equity: When senior lenders preclude subordinate debt, sponsors can raise preferred equity through an A/B or pari passu (equal footing) waterfall structure.
- Co-GP Capital: To maximize leverage, sponsors can issue multiple classes of preferred equity to preferred equity investors, co-GP investors, and the sponsor.
Preferred equity and co-GP investments are structured as an equity stake in the property-owning entity, not debt, so there are no mandatory debt service payments that could trigger a default. Payments are only made if and when there is available cash flow after payment of senior debt service, operating expenses, and any required reserves.
Navigating the Complex Landscape of Gap Financing
NetLeaseX Capital specializes in navigating the complex landscape of preferred equity and co-GP capital, which are often less understood and more challenging to raise compared to senior loans.
Uses of Gap Financing
Gap financing can be used for a wide variety of purposes on all major property types, including:
- Funding interest or operating deficits
- Acquiring land and funding predevelopment costs
- Providing an interest reserve for the senior loan
- Funding tenant improvements and leasing commissions
- Buying out existing partners
- Cashing out a portion of sponsor equity
- Covering capital calls to limited partners
Our Approach
NetLeaseX works closely with sponsors to understand their objectives and craft gap financing tailored to their deal. We identify the ideal investors from our proprietary network, facilitate negotiation of terms, and coordinate all aspects of due diligence and closing.
Get Started with a Complimentary Consultation
Don’t let a funding shortfall derail your real estate project. Contact us today for a complimentary consultation to discuss your gap financing needs. Our experienced team will review your deal, explain your options, and work closely with you to develop a tailored financing solution that maximizes your leverage while protecting your interests.
To get started, please call Ron Zimmerman at (513) 621-1031, chat with us online, email a summary of your project and financing needs to ronz@netleasex.com, or schedule a consultation at your convenience. You can also review our due diligence requirements and underwriting guidelines for various property types by clicking here.
Using Preferred Equity to Increase Real Estate Investors’ Leverage and Enhance Returns
White Paper
Original: September 2022
Updated: October 2024
This whitepaper discusses how NetLeaseX works with real estate investors to structure investment relationships with “below the radar” high net worth investors, family offices, registered investment advisors, equity funds, and institutional investors to help such investors, including non-institutional sponsors and even new sponsors who lack financial resources, to raise preferred equity so that they can close more deals and earn more fees.
Strategize With Preferred Equity
The Scotsman Guide
December 2018
This article gives an overview on how real estate investors can increase leverage by raising preferred equity to fill the gap between the amount an investor can raise in senior debt financing and the sponsor’s equity investment. This article further discusses various ways preferred equity investments can be structured including, for example, creating one or more tiers, waterfall priority order (e.g. A/B structure vs. pari passu), recourse, repayment schedules, control rights, and capital shortfall requirements.
The Power of Stretch Loans for Family Office Investors
This article explores how commercial real estate investors can secure custom stretch loans from high net worth and family office investors, combining senior debt and preferred equity features to obtain high-leverage, short-term bridge financing with favorable pay rates.
Famcap.com | May 2024
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Throw Out A Lifeline
The Scotsman Guide
July 2020
This article discusses how real estate investors may be able to raise rescue financing to cover operating losses and/or mortgage payments during the Covid-19 crisis. Raising rescue financing is especially important for real estate investors who may face substantial liability due to personal loan guarantys if their lender were to foreclose; thus, triggering a forced sale at a fire-sale price.
Ride To The Rescue
The Scotsman Guide
August 2020
As a follow-on article to “Throw Out A Lifeline”, this article discusses how rescue financing, in effect, works like bridge equity, a temporary infusion of cash from an investor that well eventually be bought out via refinancing or sale when real estate markets normalize. This article further lists various ways how rescue financing can be structured both as debt and equity investments.
NetLeaseX Capital Offers Family Offices Direct Access to Rescue Financing Investments in Real Estate
Famcap.com
October 2023
This article discusses how family offices and other sophisticated real estate investors can access NetLeaseX’s platform to freely review NetLeaseX’s pre-screened, “investment-ready” transactions, including rescue financing, preferred equity and co-GP investment opportunities. The article further discusses why NetLeaseX believes that a better way to invest in commercial real estate in today’s market is to provide rescue financing to sponsors, particularly in multifamily.