Understanding The Varieties Of Equity Capital Involved In A Commercial Real Estate Transaction

2 However we will briefly examine the general concept of tax deferral. Assume a sale nets the owner $100,000, creating a tax liability of $20,000. Cost Approach 2. Sales Comparable Approach 3. Income Capitalization Approach

The Income Capitalization Approach analyzes the income and expenses generated and incurred on the property and then capitalizes the Net Operating Income (cash flow before debt service) in order to arrive at a current market value. Some borrowers feel that the appraised value should be the value underwritten by the lender.

Cap Rate Net Operating Income / Value (or Purchase Price) A cap rate is merely an expression of the unleveraged annual return on one's investment.

Value Net Operating Income / Cap Rate (input)

Sponsor Equity: This is the cash investment contributed by owners of a project.Preferred Equity: Preferred equity is similar in structure to a mezzanine loan; however, many of the complexities involving mezzanine debt are avoided. Institutional Joint Venture Equity: Institutional investors have a strong appetite for joint ventures with experienced owner-operators or developers. In many instances, institutional equity partners seek to limit overall property leverage to between 50% and 60%, thus lowering the internal rate of return to the sponsor.Institutional joint venture equity transactions generally are structured so that the institutional investor contributes between 80 percent and 90 percent of the required equity, with the sponsor investing the remainder. Sponsor Equity2. Preferred Equity3. Mezzanine Debt4. Senior Debt