Subordinated loan in real estate and how we use it in our projects. A subordinated loan in real estate is a type of loan in which the lender’s claim on the collateral is subordinate to the claim of another lender. The subordinate lender provides a loan to a borrower. To be tax compliant this type of subordinate loan must be made after the borrower has exhausted all other sources of capital, and the loan will typically come with higher interest rates than a traditional loan. The subordinate lender is taking on more risk than the primary lender and as such, will require additional security from the borrower. In most cases, a subordinated loan will only be made against income-producing commercial real estate, such as apartments, office buildings, and shopping centers. But how we at CPH Invest use it for Land Development makes absolutely sense, as you will see in these examples.
Different types of subordinated loans in real estate and examples how we use subordinated loans in our real estate projects
Subordinated loan in real estate and how we use it for our projects. We use three different types of subordinated loans in our Real Estate Projects. Mezzanine Loans, Bridge Loans and Equity Participation Loans.
Mezzanine Loans are a type of financing in which the lender provides a loan to the real estate developer and gets a much higher interest rate than through traditional debt financing. To be tax compliant the loan is structured as subordinated debt to senior debt such as mortgage loans, and is usually used to finance projects with higher risk. An example is our funding of Cala Pi Homes in Mallorca where we (CPH Invest) gave a loan for five years to the Spanish company (Cala Pi Homes) to buy land for development. It was paid back after successfully developed the first houses in the project Manzana de Cala Pi.
Subordinated Bridge Loans: These loans are used to provide short-term financing while the borrower is awaiting additional funding from, for example, a bank loan or an equity investment. This type of loan is secured by a deed of trust on the property, and is normally used for commercial real estate projects with estimated completion times of 12 to 18 months. An example is our recent project of Steininger Island in The Bahamas.
Equity Participation Loans is probably the highest pay out loan for an investor. An Equity Participation Loan is often used to finance land development and pre-construction costs. The lender provides funds to the borrower in exchange for a percentage of the profits when the project is sold. This percentage can be fixed or variable, depending on the agreement between the borrower and the lender. An example of an equity participation loan is our recent Land Development Project on Mallorca.
Crowdfunding in Real Estate
Crowdfunding in real estate is a new way to finance real estate projects such as new construction, renovations, acquisitions, and more. Specifically, it is the process of raising funds from a large number of people through online crowdfunding platforms. Investors contribute smaller amounts of funds and are then pooled together to fund a larger project. Benefits of real estate crowdfunding include access to capital quickly, lower risk, and access to experienced professionals to help manage the project. Additionally, this type of real estate financing can provide investors with a steady stream of returns.
Subordinated loan versus equity in real estate
Subordinated loan and equity are two popular forms of financing available to real estate investors in CPH Invest.
A subordinated loan is essentially a loan in which the lender agrees to an arrangement that puts their loan at a lower priority for repayment compared to other creditors. It is essentially a form of a mezzanine loan that typically provides more leverage to the borrower.
In contrast, equity is an ownership stake in the real estate investment. Usually, real estate equity is done by investors who, instead of loaning money to the borrower, take a share of the ownership. The primary benefit of equity financing comes from the income generated from the share of the property’s profits.
Both subordinated loans and equity are common tools used to finance real estate investments. The main difference between them is the nature of the loan. Subordinated loans allow the borrower to access more leverage while equity provides an equity stake in the property. Each form of financing also carries with it distinct
Equity financing in real estate
Equity financing is obtaining investments from investors to finance real estate projects. It involves selling investors a stake or ownership in the property, allowing them to share in the profits from its sale or development. Equity financing may also involve selling partial ownership in a real estate company. Investors can receive their share of the profits in the form of periodic income distributions or when the company or asset is sold. Equity financing typically involves less risk than debt financing, but investors may have less control over the assets than if they had taken a debt loan. Read more about the optimal use of equity and see how it works.