With 2020 winding down, we in the real estate industry are gladly looking forward to 2021. Like any year, there will be challenges in 2021. One uncomfortable truth is that certain properties are likely going to see a decline in value if they have lost key tenants, have not been well maintained, or were hurt by COVID related delays and cost overruns. If these properties are over-leveraged, with loans that are in default or matured, a lender may be within their rights to ask for a loan paydown or demand repayment. A sponsor/developer/investor may not want to pony up the cash as they have other uses (i.e. take advantage of buying new property, maintain liquidity) or may simply lack the cash on hand to meet the lender’s demand. The sponsor could choose to sell, but that creates a taxable event, and she could also be selling at an inopportune time. What is a sponsor to do in this case?

Enter: the equity recapitalization. An investor could choose to sell an interest in their property to raise capital, maintaining a portion of it to realize future upside. There are many steps to this, the first being to determine the appropriate recapitalization price. Once this is determined, the investor needs to find the appropriate capital partner, something that an experienced Capital Markets Advisor like FinanceBoston can assist with.

An equity investor will like the set up as there may be a fixed price, along with an experienced operating partner. And the sponsor, if selling below what they perceive to be market value, can often obtain attractive promotes in exchange for the fixed priced that they agree to sell part of their property.

FinanceBoston can also assist banks if a borrower is not cooperative. If you have a problem like the one described above, please feel free to introduce us to your borrower, as we may be able to help them and help you.