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| Financing and Advisory Services |
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Debt
RKM Capital has placed debt financing on various types of properties with all types of capital lenders. During the course of our history in arranging permanent and interim real estate debt we have positioned ourselves to routinely advise clients of arbitrage structures available in the marketplace. The firm is adept at arranging permanent loans, construction loans, bridge loans, financing including mezzanine and equity, as well as presale investments and our ground lease program. We have deep relationships with all major real estate capital providers.
CMBS/Wall Street
CDO
Life Company
FNMA/Freddie Mac/HUD
Commercial Banks and Thrifts
Pension Funds
Private and Institutional Equity |
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Construction
Achieving success in construction financing takes hard work, strong working knowledge and deal-specific expertise. RKM Capital has arranged financing on many different types of construction loans and we can assist you with your next project. |
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Bridge
Whether you are attempting to secure interim financing to reposition or stabilize a property, move-up the leverage curve by going deeper into the capital structure on a new project or to release "Trapped Equity" on an existing asset or portfolio, we can provide the right capital solution.
Bridge loans are an important part of our financing capabilities. Frequently a property is purchased before stabilization or as part of a “value-added” strategy. In these scenarios, we help maximize loan dollars to minimize higher priced equity requirements. In this way, our client obtains the lowest overall cost of capital on financing proceeds.
Floating rate debt with flexible prepayment allows the properties to be refinanced with permanent financing as soon as stabilization is achieved or it allows the properties to be sold without prepayment penalties to attract the highest sales prices. |
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Structured Financing
RKM Capital’s structured finance group uniquely combines capital markets expertise with extensive hands-on commercial real estate investment experience. Our transactional approach to commercial real estate financing combines an understanding of asset, portfolio, and entity-level issues with knowledge of capitalization parameters to create the optimal capital structure, access the appropriate capital, and enhance the value of the transaction. Our core competency in structured finance is evidenced by a strong track-record of successfully completing the following types of transactions. |
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Mezzanine & Equity
RKM Capital has a comprehensive database of the programs of mezzanine and equity capital providers nationwide. Our database organizes available capital by providers’ preferred property type, geography, leverage level, term, type of security required and other differentiating factors. Our wide-ranging knowledge of each provider’s program enables it to negotiate the best economic deal available and successfully. Equity can be structured in a variety of formats. Normally a preferred return of varying rates is applied based on the risk level of the transaction. After capital is returned, profit splits are based on different payback scenarios. Most typical is a waterfall scenario where the investor gets back a higher percentage of profits until a desired internal rate of return is achieved, then the ratios flip-flop in favor of the developer. Most investors have flexibility in structuring these transactions and equate an overall IRR with the risk level of the transaction. Overall leverage can be as high as 100% of total financing. Clients frequently need a joint venture equity partner in order to meet their required capital needs. So, it is integral to the structured finance approach, that we use our extensive database to assist our clients to meet their financing goals. Our clients realize the significant added value when our firm advises on all components of a project’s capital structure. |
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Pre-sale Investments
For some asset types, we can arrange up to 100% of the capital necessary to develop a project along with a commitment to purchase the property upon completion of the project. This structure allows a developer to earn both a negotiated development fee and margin on disposition while investing little or no capital into the project and having the security of a certain exit. Terms and conditions surrounding this type of transaction are negotiated based upon the individual strength of the project and sponsorship suitability. |
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Ground Lease Program
RKM Capital, through a partnership, is proud to announce its “new” Ground Lease Program.
The partnership will execute sale-leaseback transactions of the ground under commercial properties, in conjunction with the acquisition/disposition of a property by an owner/operator, who acquires the fee interest. We then lease the land back to the owner/operator on a newly created, 99-year ground lease at an initial lease rate typically 200 bps less than commercial mortgage rates.
While the “new” ground lease economic terms are tailored to each asset, they are extremely active to the owner/operator’s equity returns. The purchase price of the ground is usually 30% of the total acquisition cost at a cap rate 150-200 bps less than the overall acquisition cap rate. For example: a partnership recently purchased and leased back land at a 4.05% cap rate on an asset that traded at a 5.7% cap rate. The ground lease structure improves the cash-on-cash return and increases the return on equity. The lease contains a repurchase option at a favorable cap rate, typically after 75 years. The ground lease itself is Capital Markets compatible, having been accepted by several arms-length CMBS lenders and their respective counsel.
The acquisition of the fee interest has the following benefits:
- Cash-on-Cash Return Enhancement
Providing up to 1/3 of the capital stack at 200 bps less than typical mortgage rates increases the cash flow available to equity.
- Financing Advance Rate Advantage
As a result of a higher DSC on a leasehold loan, the advance rate can be higher for leasehold financing than a fee simple financing.
- Repurchase Option near an 8% cap rate
Leaseholder can ultimately repurchase the fee interest at an attractive price.
- Equity IRR Enhancement
As a result of lower overall financing costs and a higher advance rate, the return on equity is higher for a leasehold transaction than a fee simple transaction.
- Tax Deductions Advantage
The ground lessor acquires the non-depreciable land, leaving the leaseholder with a 100% depreciable asset in addition to deductions for ground lease payments.
- Increased Sale Proceeds
Bifurcating the leasehold from the fee interest creates greater sale proceeds to the seller.
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TI/Cap Ex Financing
Historically, TI’s/Cap Ex have been funded by landlords, tenants, or in many instances, a combination of both. In addition to not being properly capitalized for this ancillary activity, landlords often fund out of necessity.
During lease negotiations, tenants generally will accept as many TI dollars as landlords can offer. This is a form of off-balance-sheet financing; however, it does not do what off-balance-sheet financing is designed to do, which is deliver money to lessees at their cost of funds. But it’s a dubious form of off-balance-sheet financing because it is priced not according to the tenants’ corporate credit, but rather at the landlords’ nonrecourse mortgage borrowing rate plus a return. Therefore, the effective interest rates landlords charge even the most creditworthy tenants are at a premium to the rates typically obtained by such tenants in their borrowing transactions.
For tenants that self-fund their TI requirements, the immediate negative impact is on their financial statements. The TI investments are reflected on the balance sheet as ownership of a long-term, non-revenue producing asset with a corresponding increase in liabilities or cash reduction.
In some instances, due to the imprudence of borrowing high-cost TI dollars from landlords, tenants must self-finance a portion of the total TI dollars required to fully build out their space. Ironically, after having spent considerable time and effort analyzing the lease versus own decision, tenants that decide to lease still are forced to take cash off the balance sheet and replace that cash with TI assets – in effect owning real property in space they are leasing.
Our Alternative
If borrowing money from landlords is expensive and/or not fully sufficient and self-funding has its own list of drawbacks, what other alternatives do tenants have? While every tenant-landlord negotiation has its own unique dynamic, these general characteristics might improve the situation from the tenant’s perspective:
- Receive off-balance sheet financing from the landlord for 100% of TIs;
- Remove nonrevenue producing TI’s from the balance sheet and re-deploy that equity back into the core business; and
- Receive the full benefit of your corporate credit.
Advantages
There are several economic benefits. First, depending on creditworthiness, this financing is less costly than if the tenant funded its TI’s with 100 percent debt. This is achieved through the acceleration of tax benefits from an on-balance-sheet 39-year recovery period to recover the investment over the lease term. In effect, the tenant is able to expense the principal portion of the loan since it is considered rent and is fully deductible.
Second, removing an unwanted asset from the balance sheet and subsequently freeing up equity that was required to support that asset is a clear advantage. Consequently, that equity can be borrowed and reinvested back into core business operations, creating significant additional qualitative benefits.
Finally, assuming freed-up equity can be reinvested; there are direct positive impacts on the profit and loss statement and lower operating expenses. For tenants with healthy cash balances, at the very least this enables them to consider the option of purchasing their own corporate paper, and therefore having easily convertible liquidity whenever needed. In effect, this is swapping the TI net book value, a non-earning asset, into a corporate security.
Ultimately, we provide an easy conduit for sale-leaseback of TI assets owned by Tenants and/or Landlords, resulting in a material increase in property values and savings to both Tenant and Landlords.
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Quick Close
There are times where a transaction must close in a very tight time frame. There may be an opportunity to create substantial value for certainty of close. We have relationships with public and private sources of capital that can close quickly. Pricing varies depending on capital source and transaction specifics. |
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