Subordinate Debt
Subordinate debt, also known as mezzanine financing or junior debt, is a type of financing that ranks below senior debt in terms of repayment priority. In the context of commercial real estate, subordinate debt is used to fill the gap between the senior loan and the equity invested by the property owner. This type of financing is typically secured by a second lien on the property or, in some cases, by an equity interest in the property-owning entity. Subordinate debt allows property owners and developers to secure additional capital without diluting their ownership stake, making it an attractive option for funding acquisitions, renovations, or new construction projects across all asset classes, including multifamily, office, retail, industrial, and mixed-use properties.
At Centum Capital, we specialize in advising clients on the strategic use of preferred equity to enhance their capital structure. Our extensive industry knowledge and strong network of preferred equity providers enable us to secure favorable terms for our clients, ensuring they can optimize their investment strategies and achieve superior returns in the competitive commercial real estate market.
Preferred Equity
Preferred equity is a form of financing that sits between traditional debt and common equity in the capital stack of a commercial real estate transaction. It offers investors a preferential return on their investment before any distributions are made to common equity holders, providing a lower-risk option compared to common equity. In the context of commercial real estate, preferred equity is often used to bridge the gap between senior debt and the sponsor's equity contribution. Preferred equity investors typically receive a fixed or variable return, which is prioritized over returns to common equity investors.
The sizing of preferred equity is generally determined by the overall capital needs of the project and the amount of senior debt that can be secured. Preferred equity can account for 10% to 20% of the total capital stack, supplementing senior loans that cover 60% to 75% of the project's value. This allows sponsors to reduce their own equity contribution while still achieving the desired leverage for the project.
Mezzanine Financing
Mezzanine financing is a hybrid form of capital that combines elements of debt and equity, providing a flexible financing option for commercial real estate projects across all asset classes. Positioned between senior debt and common equity in the capital stack, mezzanine financing is typically secured by the equity in the property rather than the property itself. This type of financing is often used to fill the gap between what senior lenders are willing to provide and the total capital needed for a project. It is especially valuable for funding acquisitions, renovations, or new developments and offers lenders the right to convert to an ownership or equity interest if the loan is not repaid on time and in full.
Commercial Property Assessed Clean Energy (C-PACE)
C-PACE (Commercial Property Assessed Clean Energy) financing is an innovative funding mechanism designed to help commercial real estate owners improve the energy efficiency and sustainability of their properties. This type of financing allows property owners to secure long-term, fixed-rate financing for energy-efficient upgrades, renewable energy installations, and water conservation measures. C-PACE financing is repaid through a special assessment added to the property's tax bill, which can extend up to 20 or 30 years. This structure ensures that the repayment obligation stays with the property, not the owner, providing a secure and attractive option for investors looking to enhance the sustainability of their commercial real estate assets across all property types, including multifamily, office, retail, industrial, and mixed-use properties.
The sizing of C-PACE financing is typically based on the projected energy savings and the value of the property. Financing can cover 100% of the project cost, making it an attractive option for property owners who want to undertake significant energy efficiency improvements without upfront capital. C-PACE can often be layered with other forms of financing, allowing for greater overall leverage and improving the project's return on investment.