“Alas, liquidity is nice but whereto the equity.”
                                 – Sponsor from the Middle Ages
 

“The NAV Awakening: Part I – When Equity Disappears, Invent It”

Equity allocators say they’re looking for opportunities, yet few are writing checks. Most have cycled lower in the stack, chasing yield through preferred or subordinate positions that technically look like equity but behave like debt. That shift has left a gaping hole for entrepreneurial sponsors trying to close new acquisitions or start development.

The Paradox:
There is plenty of capital in the system, but little of it willing to take true equity risk. Even well-capitalized sponsors are forced to over-commit their own capital. Deals stall not because of bad underwriting, but because the equity simply is not available.

One solution being peddled is recapitalizing stabilized assets with structured finance such as C-PACE, ground leases, mezzanine, or preferred equity. Though each has legitimate use cases, all come with significant impediments on stabilized transactions:

• C-PACE is not available in every municipality and requires recent qualifying capital expenditures. It also forces the senior lender to assume greater risk by subordinating to higher annual tax assessment payments.
• Ground leases are not viable in every market and require a full restructuring of the senior loan.
• Mezzanine and preferred equity often cannot be serviced on a current basis due to already tight DSCR on stabilized assets. This necessitates a PIK structure, which typically out-accrues the asset’s value growth, creating negative arbitrage and diluting sponsor equity.

The solution is not working harder raising new equity but rather structuring it smarter.
Developed by Eyzenberg & Company, Hybrid NAV Equity is engineered to solve the market’s current ills.

The NAV Playbook:

1) We provide 80–95 percent of the equity stack required to capitalize a value-add or opportunistic transaction (the “Receiving Deal”).

2) Capital cost is fixed (non-participating) and priced between preferred and common equity (assuming you can still find common equity).

3) A UCC-1 filing is placed against a stabilized second or third asset (the “Collateral Asset(s)”) as insurance for repayment of the NAV facility.

4) If there is a deficiency in repayment from the Receiving Deal, we have two remedies:

•  Market the Collateral Asset for sale, and subsequently
•  Collect net cash flow through the deal’s specific waterfall until the NAV facility is fully repaid.

Sponsor Wins:

• Obtains the required equity necessary to execute the desired business plan.
• Retains control of the deal structure and upside participation.
• Unlocks liquidity from stabilized assets without a sale or refinance.
• Avoids dilution or punitive preferred-equity terms.
• Preserves non-recourse treatment with limited exposure on collateral assets.

Next time in Part II:
We will break down how Hybrid NAV Equity is being deployed in live transactions and why sponsors are calling it the smartest capital in today’s market.

– David Eyzenberg (Adjunct Professor at NYU Schack Institute of Real Estate & University of Miami Herbert Business School)