SUMMARY
Sponsor
A multi-generational private family owner of over 5,000 units in the metro DC area.
Challenge
Sponsor was under contract to purchase a large multifamily project from an institutional seller when the COVID-19 pandemic emerged. Potential lenders re-assessed and reduced their pro forma level of underwritten NOI and added debt service reserves not previously required, which had the effect of increasing the overall cash equity required to close on the acquisition by almost 10%. The additional equity required came at a time when traditional sources of equity were pulling back from committing to investments, and increasing their required rates of return, to compensate for the additional uncertainty brought on by the pandemic.
Solution: Sapphire Capital Group’s Ground Lease Capital (“GLC”)
GLC is cost-effective capital used primarily in refinance or acquisition transactions, which reduces the overall cash equity required for a commercial real estate owner/operator to close.
The emergence of the COVID-19 pandemic has significantly tightened debt underwriting criteria, and created an environment where additional cash equity is required to close on acquisitions and recapitalizations.
The Sponsor was facing a critical closing deadline, and needed a solution to bring additional capital to the closing table to satisfy lender requirements. The highly competitive nature of the metro DC multifamily apartment market did not leave much room for Sponsor to pay for high-cost preferred equity or expensive mezzanine debt.
The Sponsor learned of Sapphire’s expertise in alternative capital solutions from the seller, a long-standing institutional relationship familiar with Sapphire’s strategies and ability to implement innovative capital solutions. The Sponsor approached Sapphire to assess the fundamentals of the acquisition and conduct a competitive process to identify a suitable lower-cost GLC investor for the pending acquisition. Sapphire quickly determined the best GLC investor based on economics and required lease features, and was able to bring the lender-approved investor and qualifying GLC capital to the closing table within approximately 45 days of engagement.
By utilizing the GLC strategy arranged by Sapphire, Sponsor was able to satisfy significant additional cash equity requirements and successfully close on its acquisition by the prescribed deadline, without having to raise high-cost preferred equity or mezzanine debt. Sponsor’s overall cash equity required to close was ultimately reduced by 35%.