Preparing for a Capital Event
Preparation Equals Planned Performance
Alissa Adler, Principal
A capital event can take many forms and be positive or adverse. It can include raising debt and equity for an acquisition, refinancing debt for an existing loan or recapitalizing to bring in partners to free up embedded capital. Over the last few years capital events were sometimes unplanned and unwanted. For some, an existing loan was underwater; for others it was legacy issues keeping new capital away. But today lenders are back, values are rising and equity is off the sidelines.
Capital events don’t creep up on you slowly. You have made a conscious decision on an acquisition strategy, a loan is set to mature, deficit operating capital is anticipated or a partner decides they want to invest elsewhere. Being prepared for those events is critical to the success of the recapitalization, in terms of both proceeds and credibility.
Many local investors have operated in a world where the property and partnership level reporting is informal; records barely exist or may be hard to produce. This becomes problematic when a capital event occurs. Banks are much more sophisticated today than in the past, and institutional lenders such as insurance companies and CMBS have documentation checklists longer than your arm. On the equity side, Institutional capital seeking a local partner to handle day-to-day operations has many choices and will scrutinize your accounting and reporting capabilities closely.
Planning in advance for capital events is always your best option. If resources aren’t available in-house, or there is uncertainty about how to prepare properly, bringing in an Investment Advisor to assist you in the process is a valuable option. An Investment Advisor brought in at the front end will assist you in documentation preparation and alert you to areas that need to be enhanced, as well as pre-value the asset(s) so that expectations are data driven, realistic and achievable. Your Advisor can also assist you in preparing professional marketing materials which will be used by you or the Advisor to seek particular capital partners for debt, equity or disposition.
Three main areas need attention six to twelve months in advance of a capital event:
- The properties themselves: Look at your rent roll for pending expirations, tenant credit issues and vacancy. With adequate time and planning, tenants can be renewed to stabilize the cash flow, outstanding balances can be collected or tenants can be evicted.
- Tax and estate planning: Sit down with a financial advisor and consider the taxable impact of the event.
- Document gathering: Gather pertinent financial documents for the asset in advance. Personal financial statements for the sponsors and/or guarantors as far back as three years may also be required. For certain institutions, personal background checks may be performed