Raising Capital Can Be Difficult In Even The Best Markets. This Firm Has A Solution For Uncertain Times

While it may never be a simple time to be a commercial real estate property owner, the last three years have brought a unique set of challenges, from the pandemic to the Russia-Ukraine War, leading to rising inflation and volatility in the public and private markets.

John Todd, head of real estate investment banking at LEX Markets, understands the anguish that CRE owners have experienced over the past several years, whether they own a New York City office or Sun Belt multifamily property. 

“No matter where you are or what you own, we have all gone through this together in the real estate community,” Todd said. “Having weathered a historic pandemic, owners are now facing additional headwinds from inflation, to rising interest rates and to the potential risk of a recession. Markets have once again been plunged into a state of uncertainty.”

Todd said that during these difficult times, raising capital can be a fraught and arduous process, particularly when capital needs to be returned to partners and investors. Rising rates introduce substantial refinancing risk and, depending on the market’s success at price discovery, recapping equity or selling assets outright can also be challenging.

“Transaction volume has substantially decreased from the record-setting levels seen in prior quarters, both in the commercial and residential real estate markets,” Todd said. “The arrival of vaccines opened the floodgates and capital flowed freely, but recent events have reversed that trend.” 

He added that while he believes price discovery will work itself out eventually, there is still going to be a prolonged period where matching owners with the right type of equity capital will be a bit of a dance. There is a lot of interest still for industrial and multifamily properties, but what about other asset types? Here is where LEX can help, Todd said. 

LEX specializes in taking single real estate assets public. Through the LEX platform, owners can recap equity in their property to investors, who in turn buy fractional ownership in a specific real estate asset. The owner retains control of the property. 

LEX recaps equity on stabilized or near-stabilized properties, working closely with owners to arrive at a reasonable valuation based on the cash-flowing prospects of the asset, the existing or proposed capital structure and future capital needs.

“Regardless of your type of property or your situation, if you have a good story of cash flow and solid fundamentals, LEX is another tool in the toolkit,” Todd said. 

The capital that LEX raises is passive, so owners do not need to divert from their current business plan. It is also perpetual, eliminating the need to execute a future recapitalization. Todd said LEX is working with owners who have proven track records and are simply looking for ways to raise capital without having to sell their assets.

“Finding the right equity partner today is difficult, especially if you're looking to solve a number of problems,” Todd said. “LEX can bring a multitude of interested parties to the table in a much different form that, long-term, sits alongside an owner in a much better way. It allows the owner to continue to operate the property in full alignment with investors.” 

Todd said that in an uncertain market, providing building owners with flexibility and stability through perpetual, nonvoting equity, as LEX does, eliminates a lot of worries so they can focus on maximizing the value of the asset. He added that he has been a building owner himself and understands how much energy can be diverted dealing with partnership issues and decision-making instead of focusing on the real determinants of asset value.

“Taking a lot of that anxiety and risk off the table goes a long way toward allowing owners the opportunity to really perform,” he said. 

Todd said he is optimistic about the future, and he believes that, as in previous downturns, there will be a temporary flight to quality and to cash flow. Some real estate property types will outperform others, but there are plenty of great investment stories out there and LEX is out searching for them. 

“If we can help owners focus more on real estate fundamentals and less on the capital dance, that really puts everyone in a better place,” he said.

This feature was produced in collaboration between Studio B and LEX. Bisnow news staff was not involved in the production of this content. 

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