- December 1, 2023: Vol. 10, Number 11

5 Questions: What is ‘dequity’ and why is it needed?

by Mike Consol with Eric Brody

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Eric Brody, a New York City developer with almost 20 years of experience, has built around 800 units across the Big Apple, totaling nearly $1 billion in real estate projects.

Brody, the son of an architect, began recognizing the challenges facing developers, including inefficient processes and limited credit access, and decided to establish ANAX Real Estate Partners, a privately held New York City-based real estate developer, lender and investment firm dedicated to recapitalization, project completion and stabilization.

ANAX, for which Brody serves as managing partner, is focused on deploying rescue capital into distressed multifamily and commercial New York City real estate projects in the form of “dequity.”

What is “dequity”?

Exactly as it sounds, “dequity” is a creative investment structure that combines characteristics of both debt and equity financing — a strategy that is gaining traction among developers who are looking to fill gaps in their capital stack and transact in today’s tightened lending market. Specifically tailored to situations where traditional funding channels have become inaccessible due to heightened risk factors, dequity serves as a strategic solution to prevent foreclosure or project failure. It can come in many forms, including preferred equity, mezzanine financing, bridge loans and others.

What challenges in today's real estate market make dequity an attractive investment strategy?

More than $8 billion in commercial mortgage backed securities (CMBS) loans tied specifically to multifamily properties matured in November this year. Looking ahead, over the next 24 months, $9 billion worth of loans are coming due in the Tri-State area [New York/New Jersey/Connecticut] alone, $2 billion of which are at-risk loans related to multifamily projects. This, combined with slowing rent growth, has the potential to negatively impact developers’ net operating income. At the same time, bank failures, high interest rates, inflation and other factors have caused challenges for developers in securing traditional loan agreements. As a result, developers find themselves in a scenario where they must consider different forms of financing to plug the hole in their capital stack. That’s where dequity comes in, offering a hybrid investment vehicle as a lifeline to distressed developers and assets.

Describe a scenario where dequity structures make sense.

Consider the following situation: A real estate developer initially planned to build a condominium tower offering for-sale units. Unforeseen changes, such as rising interest rates and a softened housing market, require the developer to convert those units into rentals. This shift creates financial complexities, as the original construction lender had planned on being repaid as units were sold. As a result of the new circumstances, refinancing is now necessary. Given the current hesitancy among traditional lenders, the available choice may involve a “cash-in” refinancing, which requires the developer to contribute extra capital. That’s where a creative investment structure, such as dequity, comes in to provide funding to get the building across the finish line.

How do you see dequity influencing the broader real estate market?

Dequity adds a new tool to developers’ financial toolkits, paving a path toward stability, recovery and profitability for distressed properties that would otherwise risk foreclosure or project failure. As a result, dequity is quickly gaining momentum across the real estate industry. Dequity’s flexibility allows developers to diversify investments and enhance risk management strategies, which can contribute to the overall resilience of the real estate market. It provides a means for investors and developers to respond to changing market conditions without causing severe disruptions.

How do you anticipate dequity evolving as a financial strategy in response to changing market conditions?

As the commercial real estate market continues to face challenges like high interest rates, inflation and economic uncertainty, dequity may become an even more widely used financial strategy. Developers and property owners may increasingly turn to dequity as a means of accessing capital while mitigating risk, enabling them to pivot their financial strategies as needed. Over time, dequity may evolve in terms of its structural design to accommodate specific market conditions. For instance, dequity agreements could become more tailored to address particular challenges, offering various risk-sharing mechanisms and profit-sharing arrangements.

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