The breakdown of the “capital stack” for buying apartments!

Maricela Soberanes Tuesday May 10th, 2022

Recently we presented an investment opportunity to a group of investors, and they asked: “How do you buy those properties valued at millions of dollars?” The asset we are acquiring is $88M; I can understand the question.

So, I want to share the answer here.

Common Equity (CE) is one of four commercial real estate investment capital stack sources. The “capital stack” is the total of capital used to finance the purchase of a commercial real estate asset. 

The invested money from independent investors is also known as Common Equity (CE) or Common Capital (CC). You might have heard these terms before. Or maybe you haven’t, and this is the first time you’re hearing them. So, I will use the term Common Equity to refer to both (CE & CC).

We moved forward to break down the lending and capital raising information. When we buy an asset with the intent to syndicate, typically 50% – 70% of the property’s purchase price is financed with debt (a loan). Each deal is different, but the difference between the loan and the purchase price must be raised as “equity.” Some deals are fit for “Preferred Equity (PE)”; others only use Common Equity (CE), and some use both.

When investing in syndications, your capital is secured by shares in the limited liability corporation formed to purchase the property, not the property itself. CE’s payment priority is lined after loan and Preferred Equity (PE) (if applicable). In other words, with the profits of the business (rent and other income), we first pay the lender (mortgage), then PE (if present), then CE, then the General Partners (us).

You can argue that CE holders/investors have a higher risk. You wouldn’t be wrong. As a result, CE investors receive a higher return for taking this risk. CE investors also have the opportunity to earn higher returns as a result of a profit-sharing made on the sale of the asset. These days, most lenders’ rates are around 4%, and CE investors are compensated 7-8% Cash on Cash (CoC). 

In a private equity firm (Up Plex) sponsored commercial real estate transaction like the ones we offer, CE partners (also referred to as “Limited Partners”), and their capital contribution is a critically important component of the acquisition.

Independent investors serve a vital role in the acquisition of these assets and eventually in the community. When we purchase those assets, we rejuvenate blighted neighborhoods, add to the tax base, and provide employment for a wide range of workers, contractors, and suppliers. But most importantly, we provide affordable housing, which enables so many working Americans to live with dignity, comfort, and security. 

So when we invite investors to invest with us, we provide them with the opportunity to impact the community.

This impact is larger when we purchase larger assets as compared to how we (Up Plex) did it for years, one house or duplex at the time. We also provide investors with an opportunity to place their capital into profitable businesses where they are compensated for their risk.

Interested In Learning More?

Up Plex is a private equity firm with a focus on multi-family assets and continuously looking to invite CE partners for the acquisition of these assets.  

If you are an Accredited or sophisticated Real Estate Investor and would like to learn more about our investment opportunities, contact us at (512) 900-9763 or invest@up-plex.com for more information and investment opportunities.

Leave a Reply

Your email address will not be published.

Related Blogs

Tax Benefits of Multifamily Syndication

/ /
Comment0

Specifically, we will talk about the powerful strategy: Accelerated depreciation and how our investors benefit from it.  I think we can all agree that investing in Real Estate assets is a way to preserve capital, create cash flow and diversify our investing portfolios. The secret sauce of investing in multifamily syndications is the scalability and […]

Read More →