LaSalle Nova Capital: A New Model for Preferred Equity Investments

Gray Sheldon, managing partner of LaSalle Nova Capital Markets of Chicago, has developed a new financial formula for Real Estate Preferred Equity transactions to achieve much higher leverage ratios on the capital stack than the traditional model. For the new RE Preferred Equity Group at LaSalle Nova (the PEI model), Sheldon has coined a unique blended structure with elements of private equity, mezzanine debt and investment finance.

Mezzanine loans and preferred equity investments are used to achieve very high leverage on large commercial projects. Normally, conduits, banks and life companies will not exceed 80 percent loan-to-value when making commercial mortgage loans. Mezzanine loans and preferred equity investments are stacked on top of big construction loans or big permanent loans to achieve loan-to-cost ratios as high as 95 percent in most cases.

A preferred equity investment is quite different from a mezzanine loan, but it accomplishes nearly the same thing. The lender makes an investment of equity in the LLC that owns the big commercial project to achieve a preferred return. If the management of the LLC fails to pay the preferred member the promised return, the management is ousted and the common members of the LLC (the former owners) lose their voting rights, dividends and right to the distribution of any profit.

Preferred equity investment is here to stay and will play an important role in filling the gap left by traditional financing. Our current lending environment, with the introduction of BASEL III international banking regulations and recent adjustments to High Volatility Commercial Real Estate (HVCRE) regulations, will require financial practitioners to be much more solution-oriented with a high-level efficiency than ever before.

The real estate preferred equity formula from LaSalle Nova presents an innovative solution. It makes an equity investment in the real property of the borrowing entity, and while it is junior to the development debt lender, it is senior to the borrower’s equity. It is secured and packaged under a new formula into a single asset instrument equity joint venture (EJV) with far fewer provisions, eliminating all threats of violating the senior lender’s loan agreement.

For more information on this new preferred equity model, contact Gray Sheldon at [email protected] or at 312-224-4160. LaSalle Nova Capital Markets is located in Chicago’s Loop Financial District.

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