MHN Online has a nice piece out this morning talking about what institutional and private equity equity providers are looking for in their apartment building investment deals. According to Brian Ward, CIO of TCG Capital Markets, the requirements are much tighter than just a few years ago. Here are the high points:
- Align the style and needs of the capital source with the operator. A long term operator shouldn’t be matched up with private equity that needs short term holds to clear their return hurdles.
- Equity capital today generally comes in two two types: preferred equity or joint venture (See the table linked in the article for a good breakout of when to use each).
- Blind pools are very difficult to get funded today —even the best and most sophisticated operators have had trouble executing this type of equity raise.
- There must be local knowledge on the management team, both lenders and investors want their operators close by.
- Operators must have real skin in the game. Expect to invest cash in the range of 10 to 25% of required equity for a joint venture and at least 10% of total capitalization for preferred equity.
- The challenge is finding investment opportunities that can be prudently underwritten to meet the required returns. With average cap rates on Class A assets at such low levels, it is almost impossible to achieve the returns required by equity investors unless they have a very low cost of capital and a long investment horizon.
- Still opportunities in the Class B and C multifamily markets.
- Equity capital strongly prefers off-market multifamily investment opportunities.
What are the challenges and opportunities you’re seeing when raising equity capital?