As the Debt Markets Weaken, Joint Ventures Surge in Popularity

When I woke up to the news of Wall Street’s version of Chernobyl yesterday with the news of Lehman and BOA’s acquisition of Merrill Lynch, I experienced a sinking feeling in my stomach.  We’re no doubt facing uncertain times in our economy as the financial market meltdown will continue to emanate confusion, uncertainty, and widening gap of buyer and seller expectations from their investments.

This morning, I attended the Boston Real Estate Finance Association’s seminar titled “Equity Placement for Real Estate Joint Ventures” given by Frank Petz, Managing Director, Eastdil Secured. At this talk, Frank covered timely issues surrounding  the use of institutional equity for joint venture partnerships in real estate and how the capital stack, different sources of equity and associated strategies affect the pricing and structuring of equity for joint ventures.

Frank discussed some of the core issues rocking the financial world today and demonstrated through his presentation of equity placement, that the joint venture and mezzanine markets will continue to be active and will likely undergo some changes in the coming months and years.  Namely, these structures will be looking more closely at longer hold periods for their investments, reaching as far as 5-8 years.  Investors will begin to place more emphasis on cash flow performance than the back-end of the deal, where residuals often supported the majority of the deal’s IRR.  And lastly, as the credit markets contract and lenders continue to avoid risk, moving from 75% LTV’s to 60% LTV’s, the mezzanine and joint venture markets will grow in popularity as more commercial real estate investors seek funds to bridge the widening equity gap.

What do I see?  Buyers and Sellers are still arguing over what a “fair” CAP rate is in today’s environment.  Expect this trend to continue as the credit markets adjust and investors seek steady returns to weather the storm.

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About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at [email protected].

 


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