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.

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:

1. Mezzanine Loans: Sponsors pledge their membership interest in the borrowing entity to secure repayment, rather than granting a mortgage.
2. Preferred Equity: When senior lenders preclude subordinate debt, sponsors can raise preferred equity through an A/B or pari passu (equal footing) waterfall structure.
3. 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.