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Growing Businesses Leverage Equity to Fund Expansion

As the market recovers from the recent recession, many businesses with commercial real estate holdings are taking advantage of their equity position to expand business opportunities.  Equity financing can include a wide variety of funding mechanisms including joint ventures, mezzanine financing, junior debt or bringing in a limited partner.  Whichever source of funds, the business is able to bridge the gap between the primary debt financing that is available from banks and the cost of the purchase, renovation or development of real estate projects.

Equity funding occurs when a company pledges a portion of the business in exchange for the funding needed in the business.  The share of business pledged can range from 25 to 75 per cent of the total business, depending on the source of funds.

Equity Funding Resources

Business benefits from working with a knowledgeable lender that becomes a direct participant to provide this type of alternative debt on commercial real estate properties.  The deal can be structured with lots of creativity and technical ability if the financial partner has experience that provides deep knowledge of commercial real estate and also the ability to recognize your needs.  A direct commercial real estate lender doesn’t depend on outside, third-party underwriting.  They can offer complete control over each part of the loan origination – from sourcing to funding.

The private equity sector of commercial real estate funding is on the rise.  With interest rates still at historical lows, institutional investors seek robust, risk-adjusted returns to meet their obligations.  Their long-term portfolio allocation strategy has caused many to place some of their allotment in commercial real estate equities.

Since the bubble and bust of capital markets, the nature of commercial real estate investing has seen dramatic changes.  The new platforms are gaining because the investors have become more disciplined.  Still the lure of innovative commercial real estate investment is bringing in capital to fund the needs of business expansion.

High-Risk, High-Return

After the experience of being involuntary distressed debt investors, institutional lenders are wary of sluggish fundamentals.  Just because they can get a high return on their investment is not reason enough to take any risks.  The goal is to balance the risk and return and a good lender knows how to create the equilibrium benefitting both the company needing funds to expand and the investor needing a good return on the risk.

Business Life Cycle

One of the factors in calculating risk is the business life cycle.  Seed financing, startups, second-stage, bridge financing and leveraged buyouts each have a separate set of risks involved.  The individual source of funds may have a preference which life cycle they want to fund.

Before you engage in equity financing, make sure you are working with a lender that can properly match your interests with the investment preferences of the source of funds.  It will save you a great deal of time to work with a commercial real estate lender that has a wide range of funding options.

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About Emma Gilbert

Working in the marketing industry since 2002. This blog is one of my hobbies.

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