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Filling the cap stack gap
By feature writer William G Sipple
Even with great availability of low cost senior debt today, we still see a lot of projects suffering from a gap in their capital stack. Most of these deals are new construction projects, but there are plenty of acquisitions that have the same issue.
Many of the owners are seeking some type of "passive" equity to get their projects off the ground. They are hoping to identify groups that will take a non-controlling interest in a project and settle for lighter equity returns. They often prefer to see these investors come in through the riskiest phases of the project and want to exit them from the deal at or prior to stabilization. While there are certain groups out there that will invest in deals on this basis, they are few and far between. Owners and developers would be better off seeking a structure that appeals to a wider range of the capital sources.
Each of the first four areas above could fill a column on its own. They all require significant work to assemble, and often the timing requirements are so lengthy as to make them impractical. Putting together a hotel capital stack can be like assembling a puzzle with moving parts that must come together simultaneously. The latter three options, on the other hand, can be effective tools that are negotiated in a reasonable amount of time.
The bottom line is there are numerous options for filling a capital gap, but owners should be realistic about structuring terms that are capital friendly and the compromises that will be needed. There is very limited availability of truly passive equity that is content with mediocre returns and narrow control provisions. Owners should focus on the structure that works best for all parties.
About the author
About William G Sipple William (Bill) Sipple is executive managing director of HVS Capital Corp (HVSCC), where he leads a team of professionals that provide a wide range of real estate investment services on an international level. HVSCC is the investment banking arm for HVS, and has extensive experience in debt and equity raises, asset sales, and capital structuring. You can contact Bill at (303) 512-1226 or email@example.com
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