RealtyShares’ New Gap Financing Program: a Leg Up for the Middle Market
RealtyShares is focused on providing capital to the middle market, defined as transactions under $50 million. According to data from Real Capital Analytics, it is both the largest sector of the commercial real estate market and the one most starved for capital.
Today sponsors can struggle to get the capital they need, especially for projects smaller than $20 million. There are often two reasons. First, institutional lenders gravitate towards higher-value transactions, leaving few options for sponsors operating in the “sub-institutional” space. Second, at this late stage of the real estate cycle, a significant amount of sponsor capital is locked up in existing projects.
RealtyShares’ gap financing program seeks to address this important market need by providing subordinated financing solutions to commercial real estate operators seeking higher leverage on projects under $20 million. The suite of solutions, which includes preferred equity, mezzanine debt, and second lien loans, can help commercial real estate operators get the stretch capital they need to buy, refinance, or renovate commercial properties.
With the launch of its gap financing program, RealtyShares can now provide second lien debt for projects that may already have senior financing identified, assuming that mutually acceptable terms can be reached between the two firms. For the sponsor, this can mean higher leverage (up to 85% loan-to-cost) and a faster close.
As of March 2018, RealtyShares has provided gap financing for 178 projects with more than $205 million in capital raised. The firm can function as a one-stop shop for sponsors, helping them identify the capital structure that best suits the needs of their project.
Peachtree Medical Office
A good example of the power of gap financing can be found in Peachtree Medical Office Portfolio. Nestled in an Atlanta suburb, it is made up of three medical offices totaling 58,000 square feet of rentable space. In 2016, RealtyShares raised $3.25 million of preferred equity behind United Community Bank, the senior lender. Ultimately the project achieved an 81% loan-to-cost (LTC) ratio and funded in just four days.
“We chose to work with RealtyShares because we needed an equity partner with the sophistication, patience and flexibility to get this complicated transaction to the closing table,” says Jay Hammond, Vice President at sponsor RG Real Estate. “The team at RealtyShares worked with us to overcome obstacles including flipping a property and executing multiple leases during due diligence. The partnership that we’ve created has put us in an excellent position for an extremely successful investment.” (Testimonials may not be representative of the experience of all customers and thus do not guarantee future performance or success.)
Seattle Student Housing
Another good example of how gap financing can help sponsors is the Seattle Student Housing Portfolio. In 2017, RealtyShares funded $2.65 million of senior debt against the 106-bed property and an additional $1.05 million of collateralized debt against the sponsor’s other properties. The project ultimately achieved a 69.1% loan-to-value (LTV) ratio and closed in just three weeks.
RealtyShares’ gap financing program has the potential to create value for sponsors and investors alike. As a result of this program, investors on the platform will have access to more fully-underwritten, secured, high-yield opportunities. This program will continue to meet RealtyShares’ stringent underwriting standards. Like every investment opportunity underwritten by RealtyShares, these projects will be subject to rigorous scrutiny that involves sponsor evaluation, asset evaluation, risk analysis, transaction negotiation, and compliance. Investing in gap financing has risks, including loss of capital, so investors are encouraged to do due diligence on every potential investment.