NetLeaseX Capital Launches Preferred Equity Platform

Midwest investment banking firm NetLeaseX Capital announced that it would launch a preferred equity platform that would match investment funds and developers raise preferred equity from high-net-worth individual and family office investors.

“Preferred equity is raised through a newly-formed entity (like an LLC), which is owned by the Sponsor [fund or developer] and which takes title to real estate. The Sponsor’s interest in the entity can be structured in several alternative ways that have in common the benefit of equity-like returns with a risk profile that is usually only available to debt investors,” the company explains in a white paper.

The sponsors or general partners must have a subordinate position in the entity that is also in a first-loss position. “If the project underperforms, the Sponsor’s and/or their co-GP’s capital investments bear all of the losses before the NetLeaseX Investors’ capital and preferred return are at risk,” the paper explains. “In return for agreeing to be subordinate to the NetLeaseX Investors’ capital, the Sponsors will receive a promote of approximately 30% of project profits.”

According to the company, the investors like the arrangement because they understand the asset class, they get higher preferred returns rather than what common interests owners receive, and they reduce risk because of their investment position.

The sponsors might find the arrangement beneficial because there are no debt service requirements like with mezzanine loans or funding interest reserves. Distributions don’t happen until “if and when there is available cash flow after (a) payment of the senior loan, (b) operating expenses of the project, and (c) any amounts set aside by agreement of the managers as reserves.”

In addition, sponsors get “speed and certainty of execution; discretionary underwriting authority; no syndication risk; and working with experienced investors who invest their own capital and who have longer investment horizons than fund managers and retail investors.”

“We have direct relationships with a number of “below the radar” high net worth investors, family offices, registered investment advisors, equity funds, and institutional investors who are interested in passively ‘riding on the coattails’ of profitable real estate investments and empowering Sponsors to handle the day to day management and operation of their projects,” the company says on its site.  “Our investors are also interested in investing with non-institutional sponsors and even new sponsors who lack financial resources.”