McKinney Realty Capital maintains relationships with a variety of private and institutional capital sources. Based on the size of the loan request, business plan and location, MRC identifies the capital sources that are the best fit for the client. MRC’s involvement on each transaction can include assisting the client with drafting their business plan and LOI for the acquisition, negotiations with the lender and seller, managing due diligence and the closing process, and assisting with asset management matters post-closing.
Fixed rate loan have a fixed interest rate and are typically 5, 7 or 10 years in term. Often referred to as “permanent” or “perm” loans, these loans are best suited for stabilized assets with stable, predictable cash flows. Capital sources include CMBS, life insurance, bank, credit union and government sponsored entity lenders. Most of these loans are non-recourse and can be structured with a stepdown, yield maintenance or a defeasance prepayment structure.
Constructions loans are utilized to fund the development and lease up of a real estate project. Based on the stage of the project, timeline, property type and location, McKinney Realty Capital will identify a capital source that meets the developer’s objectives for each unique project. The variety of capital sources is likely the most diverse in all the verticals of commercial real estate investing. Ranging from recourse to non-recourse, senior debt to JV equity, sourced from banks, credit unions, government sponsored entities and private capital sources.
Agency loans include Fannie Mae, Freddie Mac and HUD loan for multifamily properties. These government sponsored entities are a key player in multifamily finance. Because the US Government shares in the repayment risk with private investors on these loans, these lenders are able to offer the most competitive fixed and floating rate financing options in market. These lenders have numerous programs and guidelines that are constantly changing based on market conditions and the government’s objectives.
Mezzanine debt and preferred equity allow a borrower to increase leverage beyond what a traditional lender is able to offer. Mezzanine debt fits between the senior or first mortgage lender and common equity in the capital stack. Rather than having a first mortgage position in the real estate, the mezzanine lender will have a pledge in the entity that owns the real estate. Unlike mezzanine debt, preferred equity investors do not have a pledge in the entity that owns the real estate. Instead, preferred equity is usually a direct equity investment in the entity that owns the property. Preferred equity often has its own share class that has a preferential return paid prior to distributions to the common equity. While they both can be structured a number of different ways, preferred equity and mezzanine returns are typically capped at their initial principal investment plus accrued interest.
Both types of subordinate financing have similar terms and conditions and either can be used across a wide variety of situations, including construction and development, rescue capital, partnership recapitalizations or for investors who are looking for increased leveraged returns.
Joint venture equity partners can provide up to 95% of the total equity required for a commercial real estate project. Unlike preferred equity, joint venture equity is common equity with unlimited returns. A joint venture equity partner will be paired with a general partner, which may be a developer or a sponsor that focuses on a unique strategy (i.e., value add multifamily properties in the Midwest). The General Partner’s responsibility is to source, close and execute the business plan on the project. The General Partner’s responsibilities include but are not limited to sourcing the acquisition, funding all earnest money and pursuit costs, managing day-to-day operations and executing the exit strategy. Joint venture equity partners will require returns and ownership that is commensurate with their principal investment and risk profile of the project. Joint venture equity can be sourced from a variety of private capital providers including funds, family offices and real estate investment trusts. Joint venture equity providers are seeking focused operators and developers with a strong track record of executing on their strategy.
CMBS (commercial mortgage backed securities) are fixed rate, non-recourse loans that typically have a 5, 7 or 10 year term and a defeasance or yield maintenance prepayment penalty. These loans are pooled with similar loans, packaged into bonds and sold to investors in the secondary market. The CMBS market was formed in the early 1990s and has evolved into a mature, stable source of funding in the commercial real estate market. CMBS is an especially common source of financing for hospitality, retail, office and self-storage assets.
As a complimentary service to existing and prospective clients, McKinney Realty Capital will provide a sale vs. refinance analysis. This is best suited for sponsors that have executed on their business plan and are ready for a liquidity event, sponsors that have a partnership dispute, or sponsors that have a looming loan maturity. MRC will underwrite the property’s cash flows, source loan quotes for a refinance and provide the sponsor with a comparison showing sponsors the “cash in their pocket” under both scenarios.
McKinney Realty Capital is able to provide workout solutions for sponsors that have troubled loans. Our experience on both sides of the table allows us to negotiate beneficial terms and outcomes for both borrowers and capital providers. Potential solutions include assumptions, recapitalizations, debt subordinations (A/B notes), interest rate and amortization modification, note sales and discounted payoffs.