“Cash is King”, perhaps no phrase better exemplifies the importance of equity in a real estate transaction. No matter how the deal is structured, at some point, someone, generally has to invest equity in the deal.
In today’s equity marketplace the business is evolving. Mortgage brokers are being asked to not only extract the best debt terms for their borrowers, but are also sourcing the whole capital stack, including equity. This evolution has some mortgage brokers asking themselves – How do I add this arrow to my quiver?
At MLG Capital, we are an equity provider. These investments are made as “JV Equity” or “Preferred Equity.” We pride ourselves on building and maintaining relationships with many different mortgage brokerage teams – both big and small. Often we are asked by our clients and colleagues – How does a mortgage broker work with an equity provider?
With the annual MBA (Mortgage Brokers Association) occurring this week in Orlando, FL, now is a great time to simplify the process, and add the equity expertise to your sourcing abilities.
Here a few quick ways to approach sourcing Equity:
Frame of Mind – Many groups agree that equity is hard to find. This can be very true, Equity providers are not as bountiful as lenders are. However, there are many different equity providers that come in all shapes in sizes. Many equity groups want to invest equity, but lack either qualified operators and/or deals to invest equity in. This is where a mortgage broker is key. Their deal flow and relationships may require equity from time to time. Having a have a short list of equity providers for all deal types is a substantial offering you can provide your clients.
When should the relationship begin? This is perhaps the biggest difference from sourcing debt. Most deals often come before a sponsor engages with a broker. Most relationships between an equity provider and an operator take time to develop. Sometimes the first deal isn’t always a perfect fit. Brokers can mitigate that by introducing equity groups to clients before there is a deal. Establish relationships, and learn about one another. Brokers can often get protection from either party to ensure the relationship can grow conflict free, and keep all parties focused on the common goal. This also ensures that as deals occur, the equity provider, broker, and sponsor can work in unison.
Understanding the Equity Provider’s Investment Box – Many equity groups have predetermined investment criteria that they use as a guide to provide investments. Equity providers want to be able to place money into deals that fit that previously determined criteria. Criteria can range from IRR returns, cash-on-cash requirements, as well as property characteristics. This criteria can help create your short list of equity partners, as well as outline the guidelines of which operators fits and who doesn’t.
Easing the Process – Perhaps the easiest part of the process is having materials prepared, and complete. This can include the sponsor’s underwriting (preferably in excel, or ARGUS), sources and uses, sale and lease comps, and a business plan. Often time waiting on the materials slows the process and the decision making ability of the equity partner.
Extra Tips At Closing – The broker can add value in a few small ways with an equity partner, ensuring that all moves to a successful closing. This can include assisting in the completion of the operating agreement (Equity’s version of the PSA) in an orderly manner, as well as ensuring that all sides of the transaction are on the same page as information presents itself. Additionally, a broker can help the partnership by providing good tax planning. For instance, a broker can structure equity fees as an additional debt fee, to allow for faster amortization.
Have a deal? Have a client looking for JV Equity?
Contact us at the info below or clickhttp://www2.mlgcapital.com/sponsorbrief to learn more.
MLG Capital invests JV Equity in the $2 to $10 Million range. MLG Capital invests in apartments, office, retail, and industrial properties across the country. MLG primarily focuses on value-added transactions in existing properties. Most successful JV Equity partnerships begin before there is a deal to be invested in. Consider connecting your deal or client with MLG Capital today.
Example JV Equity Transactions