Eli Moghavem of Base Equities: Small-Balance Preferred Equity Helps Sponsors Compete for Middle-Market Opportunities

Eli Moghavem is a Co-Founder and Principal of Base Equities, Los Angeles, a national small-balance ($1-5 million) preferred equity provider. Base Equities partners with established sponsors in various asset types throughout the United States. Base Equities principals have extensive experience in real estate debt and equity and recognize the importance of having a reliable, well-capitalized equity provider. Moghavem can be reached at eli@baseeq.com.

As commercial property sales reached record volumes last year, the market has become exceedingly competitive for buyers looking to acquire assets.

Demand for small and middle-market assets in particular has skyrocketed and, increasingly, sponsors seeking deals in this size range must be able to meet aggressive terms to secure properties.

To access the reliable and fast capital to seize opportunities on tight timelines, more sponsors are looking to alternatives of traditional equity structures such as preferred equity.

In this article, we explore preferred equity investments serving small-to-mid transaction sizes, where there can be a win-win-win for sponsors, investors and the capital markets brokerage community.

Increasing Competition is Shaping New Climate

Historically, real estate deals in the $5-to-$40-million range did not attract institutional capital. But in today’s competitive market, these smaller assets–especially those located in emerging secondary and tertiary submarkets seeing the highest growth potential–are seeing an influx of interest from entities of all sizes chasing yield.

This increased competition from buyers means transactions increasingly require non-refundable deposits and occur within ever-compressing timelines, sometimes 30 days or less.

These terms, especially the non-refundable nature of the deals, can be highly risky unless dependable equity is lined up from the outset.

A reliable equity partner has become imperative for sponsors to successfully execute their business plans.

Supporting the Successful Execution of Business Plans

Many sponsors find the flexibility of preferred equity to be the solution. Preferred equity has emerged as a lucrative and flexible way for deal sponsors to finance their acquisitions and business plans.

Too often, equity partners–including friends and family or limited partnerships–drop out before closings or demand too much of an equity share in the deal. Even if sponsors are able to scramble to pull together the needed equity and close the deal, this can lead to settling for disadvantageous terms that hinder their business plan.

Preferred equity from capitalized funds can be the key to ‘closing the gap’ quickly and, when approached strategically, allow sponsors to focus on what is most important: closing, operations and implementing their value-add program.

In addition, preferred equity will typically yield less than common equity, meaning higher net returns to common investors and general partners.

Benefits to the Mortgage Brokerage Community

Just as the ability to follow through on a quick close is critical to securing deals, it has become imperative for capital markets brokers to deliver the most competitive terms possible for their clients and comprehensive access to the capital stack. By providing their clients with debt and preferred equity term sheets, they can ensure the buyer has up to 90-plus percent of the required capital accounted for.

The flexibility offered by preferred equity can be the difference between securing lucrative property investment opportunity or missing out (and potentially losing a deposit) for sponsors in today’s market.

Mortgage brokers can take advantage of this underserved demand for small-balance preferred equity through evaluating providers and presenting clients with a capital stack that will help them continue to strategically transact in this competitive market.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to NewsLink Editor Mike Sorohan at msorohan@mba.org or NewsLink Editorial Manager Michael Tucker at mtucker@mba.org.)