Understanding the Basic Financing Structure in Real Estate: Debt & Equity

Navigating the complex world of real estate financing can be challenging, but understanding the basic structure of debt and equity can provide clarity. Here’s a visual breakdown of all the sectors to help demystify the key components:

Debt Sources (Lenders):

Debt financing is when you borrow money you need to pay back later, usually with extra money, called interest. Lenders, like banks, give you this money upfront, and you agree to pay them back in regular amounts over time.

Developers usually pay back debt every month. The payments can be the same monthly or change depending on the interest rate. This amount includes paying off both the borrowed money (the principal) and the interest over a set period.

Debt is often cheaper than other types of financing because assets, like property or equipment secure it. This means if you can't pay back the loan, the lender can take these assets. Because there's less risk for lenders, they charge lower interest rates compared to the returns investors and developers expect from riskier investments.

Types & Examples

• Government Sponsored Enterprises (GSEs): Entities like Fannie Mae and Freddie Mac that provide liquidity to the mortgage market by buying mortgages from lenders and packaging them into mortgage-backed securities.
• Bank Financing: Traditional commercial banks provide loans for real estate projects, often requiring collateral and regular repayment terms. Examples: 美国银行 , J.P. 摩根 , 富国银行 , Truist , PNC , 汇丰 , & more.
• Life Companies: Insurance companies invest in real estate loans as a way to diversify their investment portfolios. Examples: Barings , Prudential Financial , TIAA , Pacific Life , New York Life Investments , MetLife , Northwestern Mutual & more.
• CMBS Financing: Commercial Mortgage-Backed Securities are a type of bond backed by commercial mortgages. Examples: 美国银行 , J.P. 摩根 , 富国银行 , 花旗 , 瑞信 , 德意志银行 , 瑞银集团 & more.
• Foreign Banks: International financial institutions provide funding for global real estate projects. Examples: 法国巴黎银行 , RBC , MUFG , 三井住友银行 , & more.

Equity Sources (Owners and Investors):

Equity investors are people or companies who put money into a project. They usually work with trustworthy people. They often ask the developer to invest some money into the project, typically about 10% of the total equity. Sometimes, if the developer has a good track record, they don't have to invest their own money.

Equity investment is paid back from the money the project makes over time and from big financial events like selling the project or refinancing it. This happens after all debts are paid.

The order of equity investment repayment is

1. Return of Equity Principal
2. Equity Prefered Return
3. Promotional return

This way, equity investors make sure they get their money back and earn some profit from their investment.

Types & Examples

• REITs (Real Estate Investment Trusts): Companies that own, operate, or finance income-producing real estate, offering shares to investors. Examples: Simon Property Group , Prologis , Brookfield Properties , Boston Properties (BXP) , & more.
• Private Equity Firms: Firms that invest in real estate projects typically seek high returns through strategic management and eventual sale of the assets. Examples: Blackstone , 凯雷投资集团 , KKR & more.
• Pension Funds: Large institutional investors that invest in real estate to generate returns for their beneficiaries. Examples: CalPERS , CalSTRS , CPP Investments | Investissements RPC , NEW YORK STATE COMMON RETIREMENT FUND & more.
• Sovereign Wealth Funds: State-owned investment funds that invest in diverse global assets, including real estate. Examples: Abu Dhabi Investment Authority (ADIA) , GIC , Qatar Investment Authority , Kuwait Investment Authority China Investment Corporation , Public Investment Fund (PIF) , AFF & more.
• Institutional Investors: Entities that manage large pools of capital, investing in real estate for long-term growth. Examples: TIAA , 安盛 , Nuveen, a TIAA company , MassMutual , 美亚保险 , PGIM & more.
• Family Offices: Private wealth management firms that handle investments for ultra-wealthy families. Examples: Koch , Cherng Family Trust , Cascade Investment Group, Inc. , Grosvenor , Soros Fund Management & more.
• HNWI (High-Net-Worth Individuals): Wealthy individuals who invest personal capital in real estate projects, often seeking diversification and stable returns.

Public Sector Agencies:

Public sector agencies play a crucial role in supporting real estate development. They provide various forms of assistance, such as subsidies, tax incentives, and low-interest loans, to help make projects viable and beneficial for the community.

Public sector agencies help bridge the gap between private funding and the financial needs of a project. They lower the risks and costs associated with development, making it easier for projects to get off the ground. This support is crucial for projects that benefit the public, such as affordable housing, environmental improvements, and community revitalization efforts.

Their funds help cover early-stage costs and reduce the financial burden on developers. In return, these agencies ensure that the projects align with broader public goals, such as economic development, sustainability, and community improvement.

Types & Examples

• Federal Agencies: Organizations that provide funding, grants, and regulatory support for housing and environmental projects. Examples: U.S. Department of Housing and Urban Development , US Environmental Protection Agency (EPA) , & more.
• State Agencies: Entities that offer tax credits, loans, and grants to support state-specific development initiatives. Examples: California Tax Credit Allocation Committee (CTCAC), IBank California California Infrastructure and Economic Development Bank, Texas Department of Housing and Community Affairs , Texas Enterprise Fund (TEF), & more state agencies.
• Local Government: City-level programs that provide property tax abatements, zoning variances, and other incentives. Examples: City of New York —Industrial and Commercial Abatement Program (ICAP), City of Los Angeles —Adaptive Reuse Ordinance (ARO), Economic and Workforce Development Department (EWDD), City of Chicago , City of Atlanta , and more local governments.
• Specific Programs: Targeted initiatives like the Sovereign Development Financial Institutions that offer financial support and incentives to spur economic growth and development. Examples: Sovereign Development Financial Institutions Funds (CDFI), the Tax Cuts and Jobs Act of 2017, and other government initiatives.

Developer/Operator Types:

Developers and operators make real estate projects happen. They manage everything from building the project to taking care of the property, finding tenants, and more.

Developer capital is the money needed to start and run the project. This includes all the funds except for the money borrowed from lenders and the investment from other equity sources. Before construction starts, this capital usually covers predevelopment costs.

These are the costs that come before construction starts. They are risky because they are spent before the project is approved. These costs include:

• Entitlement: Getting legal permission to build.
• Design: Planning how the project will look and function.
• Special Studies: Research needed for the project, like environmental studies.
• Community Outreach: Talking to the community to get their support.
• Nonrefundable Land Deposits: Money paid to secure land that you don't get back if the project doesn't go ahead.
• Preconstruction Management: Managing the project before construction begins.

Usually, the developer puts in the first amount of money needed for the project. They might get some of this money back once they secure loans and investments from equity investors.

This way, developers take on the early risks but can be reimbursed once the project moves forward and more funding is secured.

Types & Examples

• Multifamily: AvalonBay Communities , Equity Residential , Greystar , Cortland , UDR - Opening Doors to your future , Camden Property Trust , Essex Property Trust , & more.
• Retail: Simon Property Group , Taubman Centers, Inc. , Brookfield Properties , 汉斯 , Unibail-Rodamco-Westfield , Macerich & more.
• Office: 汉斯 , Brookfield Properties , Boston Properties (BXP) , Kilroy Realty Corporation , Douglas Development Corporation , Paramount Group , Highwoods Properties & more.
• Industrial: Prologis , Duke Realty, First Industrial Realty Trust , CBRE Investment Management , CenterPoint Properties , Clarion Partners LLC & more.
• Hotel: 万豪酒店 , Hilton Hotels & Resorts , 凯悦 , 洲际酒店集团 , Wyndham Hotels & Resorts , & more.
• Mixed-Use: Related Companies , Brookfield Properties , Lincoln Property Company , 汉斯 , North American Properties , Caruso , Howard Hughes Holdings Inc. & more.

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