In our post-real estate recession economy, secured debt at the bottom of the capital stack is easy to find — depending on the asset class, 55%-70% of cost, great interest rates. Top end equity can also normally be found, although at a high preferred return (high teen’s / low 20’s), typically requiring giving up a significant part of the back-end profits, which results in taking money out of the developer’s pocket. Building the middle of the capital stack is the most important slice for the owner/developer – sizing up this part of the financing at cheaper rates results in more retained profit potential.
Filling this part of the capital stack requires patience, persistence and ingenuity, with multiple possible sources that can be layered:
EB-5 Foreign Visa Capital: For every 10 direct, indirect or induced jobs created in a high unemployment or targeted employment area (TEA) the project can receive $500,000 in investment. Job counts is determined by a qualified EB-5 economist and more jobs are deemed created than would be envisioned. Additionally, TEA’s can be expansive (Dallas’ official TEA – which is not exclusive – runs from South Dallas to West Dallas to Uptown). EB-5 capital is normally mezzanine debt, does not take a back end interest, has an interest rate ranging from 6%-12% and is repayable out of sale or refinancing proceeds in 5-7 years.
Federal or State Tax Credits: Depending on the location and type of project, the project could be assisted by low income housing tax credits, new markets tax credits or state or federal historic tax credits. All of these sources of financing provide either equity or a forgiven loan. Each of these credit programs have their own sets of complexities, and may or may not be available up front, such that the developer may need to source bridge loans for these future credit equity streams.
Tax Increment Financing: Many cities have TIF districts where grants are available for “public improvements” for projects that create tax value, jobs or affordable housing. Many of the TIF Districts have pledged out their future tax increment to projects already in the queue, which means the funds may not be available for a number of years, requiring creativity to find sources of financing (such as HUD Section 108 loans) to “advance the TIF” forward to the start of construction or redevelopment.
City Ground Leases or Infrastructure Improvements: Depending on the location of the project and the benefit of the project to the city, low cost ground leases, city developed parking garages (part of which may be leased to the developer) and city subsidies to infrastructure may be available to reduce project costs.
Charitable Grants or Low Cost Loans: If components of the project have social value, local or national charitable organizations or foundations may be possible sources of low cost financing or grants.
Get Creative: If the project has some inherent value to certain constituencies in the area, a “license” may be granted to those constituencies to use the project. An example would be a hotel room right of first refusal to sports boosters wanting access to hotel rooms during home game weekends, or arts’ patrons subsidizing affordable artist lofts for artists in residence. If a project has “public benefit” the city may have a source of funds that is not encumbered, that could be used as collateral for a tax-exempt or taxable bond issuance, the proceeds of which could in turn be used to finance the public facility.
Making these parts of the capital stack work in harmony can be tricky — but the end result may be a project that becomes feasible by reducing the overall blended cost of capital — or better yet, a project that returns a higher end profit to the developer.