Commercial Real Estate Finance
Cash Flow Financing
A cash flow facility is a loan advanced against the cash flow of a business and is typically used to generate cash for operations or to support acquisitions or growth. A lender’s primary focus is to evaluate if the business generates sufficient cash flow to repay its debt. Loan approval and the amount of the loan typically are based on three aspects:
Historical cash flow;
Projected cash flow; and
Adequate debt to cash flow ratios.
Typically, the loan amount is based on a percentage of a weighted average of historical and projected cash flow (each lender calculates the percentage differently), with the loan not exceeding a specified debt coverage ratio. Debt coverage is typically the company’s cash flow (or EBITDA) divided by the current portion of total debt plus projected annual interest expense.
A cash flow loan is structured with an increasing principle payment amortization schedule based on the company’s projected cash flow. If the company doesn’t achieve its projected EBITDA, realize anticipated operating efficiencies, or manage capital expenditures as stated upon signing the loan, cash flows may be inadequate to service its debt and default of covenants can occur.
Working Capital Business Line of Credit
Many companies require access to capital that is immediately available for a variety of reasons, and at their discretion. Business expansion, inventory, working capital and acquisition of assets are all examples of these capital requirements. LCG Capital works with established companies in securing working capital lines of credit, with rates starting at 30-day Libor + 75bps for high-credit quality companies, and Prime + 2.5% for companies with lower credit ratings or less stable cash flow.
Bridge Loan
Short-term financing used in connections with all types of transactions in need of a quick closing. Bridge loan financing is utilized when timing is critical, and certainty of closing is imperative. The key consideration when underwriting a bridge loan is the exit strategy (i.e., sale or refinance of the property). Bridge loans typically carry a higher than average coupon rate, and generally mature in 12 months or less. Bridge loans are also sometimes referred to as hard money loans.Fixed Rate Loans
Fixed Rate loans are a staple of the mortgage industry; however, many opportunities exist for negotiation on mortgage lending terms, especially interest rates, loan-maturity and prepayment penalties. Leveraging our relationships with major lending institutions, LCG Capital has the ability to negotiate the best terms possible.Fixed rate conduit loans are available in 10, 15, 20, 25, 30 and 40 year amortizations.
Hard Money
Loans provided for difficult situations that are typically short term in nature and bear greater risk then conventional loans. Hard money loans are typically only used for investment or commercial investment properties. Most hard money loans will carry a maximum LTV of 70% due to the lack of credit worthiness of the borrower, or other higher risk issues.Term Loan
A term loan is a form of senior debt that includes regular periodic payments of principal and interest in order to retire the debt at a fixed maturity date. Term loans are typically asset-based (although they can be in the form of a cash flow facility) that are based on a certain percentage of the orderly liquidation value of machinery and equipment or the appraised fair market value of land and buildings.
Asset-based loans using real estate as collateral typically have longer maturities than equipment loans because of the generally shorter economic life expectancy of equipment.
Floating Rate Loans
The floating rate loans offered by our capital sources are typically indexed to LIBOR, which in market environments such as the current, results in lower interest carry costs than when using WSJ Prime as the index. Many recent borrowers have chosen floating rate loans to take advantage of the historically low interest rates of the past few years. Floating rate loans often feature minimal or no prepayment penalties. They are particularly attractive to buyers with a two to four year financing horizon, such as acquisition of a property going though a reposition or a turnaround. LCG Capital assists its clients in assessing whether or not a floating rate loan is appropriate for their borrowing needs, both short and long term.
Senior Stretch Loan
A senior stretch (or over advance) facility is a hybrid financing solution that falls between an asset-based loan and a cash flow loan. In this scenario, a lender structures the loan with elements of both asset-based and cash flow facilities, offering availability beyond the value of current and fixed assets if the company can demonstrate sufficient cash flow. The senior stretch facility rewards companies with strong cash flow by providing a highly flexible structure that is generally priced lower than a pure cash flow loan.
Senior stretch facilities are especially well suited for companies in cyclical or seasonal industries. In these situations, a company’s ability to purchase inventory or take on additional work is often restricted to what they can finance based on their current assets. The only way these companies can grow is if they can significantly increase their inventory or workflow during peak periods. By incorporating the company’s cash flow into the loan structure, the owner can purchase a much larger inventory, increase revenues and pay back the uncollateralized portion of the loan quickly.
Mezzanine Loans
A mezzanine (or subordinate debt) loan is a hybrid facility that falls between senior debt and equity on a company’s balance sheet. Structurally, it is subordinate in position to senior debt, but senior to preferred or common stock.
Although mezzanine debt typically makes up only a small percentage of a company’s total debt, it has become extremely critical to many middle-market companies in recent years, because it can often determine whether or not a transaction closes. For example, many asset-based loans only finance a portion of the transaction’s total price, and equity may not be available to finance the remaining need. mezzanine debt can be used to fill the hole.
Typically, mezzanine facilities include both debt and equity components. In addition to a higher interest rate, which compensates for the additional risk that the subordinate lenders are taking on, mezzanine lenders are often granted warrants to buy common stock, which the lender values based on the outlook of the company, or incremental interest paid on a paid-in-kind or “PIK” basis. The use of a PIK is becoming more and more prevalent as company valuations have grown more complex and subjective, especially when dealing with private companies.
Mezzanine debt is more flexible than senior debt. It typically shares the same covenant package as senior bank debt, but the terms are generally looser. For example, a bank may limit its maximum leverage to three times EBITDA, but a mezzanine facility may allow four times.
Mezzanine debt is typically used to fund growth opportunities such as acquisitions, new product lines, expansion through new distribution channels, or plant extensions.
As one of the newest and most innovative products to be introduced into the commercial real estate finance world, mezzanine loans offer borrowers the ability to maximize leverage while potentially reducing the cost of funds. Whether being structured as partnership debt, or preferred equity, a mezzanine loan can be an integral component for a real estate owner or developer in many diverse circumstances. It takes sophisticated structuring and innovative modeling to successfully implement the usage of mezzanine loans, and LCG Capital excels in both.
Construction Loans
Often avoided by many lending institutions, construction loans prove to be some of the most challenging transactions. Fortunately, LCG Capital has extensive knowledge and experience in construction lending. As a limited equity partner in a number of residential and commercial developments, LCG has first hand knowledge of what it takes to successfully complete a development project, including all aspects of the financing.
Renovation/Repositioning
A renovation loan, which is similar in nature to a construction loan, usually involves financing for the specific purpose of upgrading an existing property in order to project the desired image of a product or service to the market. LCG Capital is able to assist borrowers in preparing the proformas and budgets for their projects prior to presenting their renovation program to the right lending source, as well as consummating the transaction with the most appropriate capital source.