Building a Capital Stack
Every real estate development project, on or off campus, will have a “capital stack” – a mix of funding sources and other incentives that comprises the capital necessary to get a deal done. Each capital stack has three components, debt, incentives, and equity, which are explained below. Together, these respective sources combine to create a “cost of capital” for the opportunity – meaning how much it will ultimately have to pay back to each stakeholder. That cost of capital (relative to how much return the project will produce) is very important as it is one of the determinants of whether a project will succeed or fail.
Used and modified with permission from Governance Project
Debt
Debt is the product with which most of us are most familiar. Consumers regularly interact with this source through financial vehicles such as mortgages, credit cards, and student loans – and in the investment world, the same fundamentals apply. Every debt obligation has a principal amount (what you borrowed), an interest rate (fixed or variable), and a repayment term (from a year to 40 years). Those three variables together provide the “cost” of debt, i.e., exactly how much the deal will need to produce in cash flow to repay the debt obligation. Interest rates and term will vary depending on the “credit profile” of the project which takes into account items like (1) value of any collateral put up for the loan, (2) the risk of non-payment, and (3) broader macroeconomic conditions (like the Federal Reserve Rate). To better understand the debt component of a deal, we recommend experimenting with the Governance Project’s GroundUp tool. This tool will serve to demonstrate how long-term debt (or lower-priced debt) can ultimately impact the return profile for an equity investor. For more on available debt sources, see Capital Sources.
Incentives
Incentives are “free money” – cash, tax credits (historic, new markets, low income housing, etc.), land, or other potential tools that can provide a direct subsidy to the project. Incentives and equity are inversely related; the more incentives a deal can attain, the less investor equity will be needed in the project’s capital stack to get the project “across the finish line”. It is very important to note that these incentives will improve the return profile for investors, as you can see by experimenting with GroundUp. For more on available incentives, see Capital Sources.
Equity
Equity is what the owner (or owners) of a project contribute to get a deal done or a business operational. Equity is viewed as an ownership percentage – if you’ve contributed 100% of the equity of a project, you own 100% of its assets and have the right to 100% of whatever cash flow is left over once you’ve paid your expenses and your debt. Bringing in outside investors – like an Opportunity Fund in the OZ context – means that initial equity ownership percentages in the project will be reduced (or “diluted”). Typically, it reduces proportionately to how much the outside investor brings in, e.g., if I contribute $500,000 to a venture and my friends contribute $300,000 and $200,000, my ownership percentage would reduce to 50%, and they’d own the remaining 30% and 20% of the business, respectively. If debt is all about “credit profile” and risks, equity is all about the “return profile,” which looks at the potential “upside” of a deal over time. For more on available equity sources, see Capital Sources.
Capital Stacking Tool
To help you understand how capital stacking works in practice, try playing with the simple return calculator.
Related Case Studies
Howard University
Washington, D.C.
Similarities: Building a Capital Stack
Howard University teamed up with the Washington, D.C. government, Fannie Mae, and corporate partners to transform 45 abandoned, university-owned properties in a neglected neighborhood into more than 300 housing units and $65 million in commercial development. The Howard University LeDroit Park Initiative had three themes: 1) celebrate the history of the area; 2) redefine the community; and 3) enhance the quality of life and safety.
LaSalle University
Philadelphia, PA
Similarities: Building a Capital Stack
In 2004, La Salle University’s Office of Community and Economic Development worked with leadership and community members to craft a realistic plan to improve the quality of life for residents around the campus. The University’s findings led them to The Reinvestment Fund (TRF), a Philadelphia-based CDFI and leader in the financing of neighborhood revitalization, affordable housing, community facilities, supermarkets, and commercial real estate.
Lehigh University
Bethlehem, PA
Similarities: Building a Capital Stack
Opportunity Zone equity was paired with Historic Tax Credits to support the transformation of an underutilized 125-year-old building on Lehigh University’s campus into 30 apartments and new retail space in South Bethlehem. Reinventing this space is part of Lehigh’s strategy to demonstrate their commitment to community, revitalize South Bethlehem, and continue campus expansion as the university grows.
Missouri State University
Springfield, MO
Similarities: Building a Capital Stack
Using a $1.25M grant from the Economic Development Administration and matching local OZ funds, the University plans to expand its efactory business incubator in Springfield, MO. According to Missouri State, this investment is expected to create “360 jobs and spur $27 million in private investment.”
Northeastern University
Boston, MA
Similarities: Building a Capital Stack
Northeastern launched the region’s first university-supported loan program for women- and minority-owned businesses. The initiative, called the Impact Lending program, enables local small-business owners to secure loans, at below-market interest rates, to acquire crucial resources to expand their businesses.
Ohio State
Columbus, OH
Similarities: Building a Capital Stack
Working through Campus Partners, a nonprofit community development corporation, Ohio State invested $28 million of its endowment funds into the “South Campus Gateway” complex.
Rowan University
Glassboro, NJ
Similarities: Building a Capital Stack
As Rowan began to increase its capital spending locally, the city of Glassboro saw a unique opportunity to leverage the Rowan investments by developing a plan for the transformation of the downtown area leading to the university. This plan ultimately became the $476 million, mixed-use development of Rowan Boulevard. In the city of Glassboro more than 30 percent of school-aged children qualified for the free lunch program and 20 percent of families earn under the poverty line.
Stillman College
Tuscaloosa, AL
Similarities: Building a Capital Stack
As soon as it became clear that Stillman would be located in a Opportunity Zone, the school’s president seized the opportunity to enlist the support of potential private equity partners, the City of Tuscaloosa, and consultants to develop investment projects for the school’s vacant and unused property holdings.
The University of Cincinnati
Cincinnati, OH
Similarities: Building a Capital Stack
The University of Cincinnati’s endowment was nearly $833 million in 2009. From 2003 through 2009, the University invested $148.6 million of this money (roughly 13.6 percent of the school’s entire endowment) to finance real estate development in the neighborhood of Uptown Cincinnati.
University at Buffalo
Buffalo, NY
Similarities: Building a Capital Stack
To encourage home ownership and help support stabilization and revitalization in and around the South Campus, the University at Buffalo offers the UB H.O.M.E. (Home Ownership Made Easy) program to full-time and part-time faculty and staff. This program is being funded by the University at Buffalo Foundation (UBF) in partnership with West Side Neighborhood Housing Services (West Side NHS), Inc., a NeighborWorks America Chartered Member with a proven track record of housing and community revitalization.
University of Chicago (Child Care)
Chicago, IL
Similarities: Building a Capital Stack
The University of Chicago and IFF, a CDFI with a history of lending to the child care sector, have worked together on multiple initiatives to create more childcare and education opportunities for Chicago’s communities.
University of Dayton
Dayton, OH
Similarities: Building a Capital Stack
The university serves as an anchor in The Dayton Arcade project which restored a 9-building complex in downtown Dayton. The projectincludes affordable and market-rate units, University of Dayton and the Entrepreneurs Center’s Arcade Innovation Hub, leasable office and retail space, and event space. The Arcade is part of a larger plan by the City of Dayton to bring residents, jobs, and visitors back to the downtown.
University of New Hampshire
Durham, NH
Similarities: Building a Capital Stack
In July 2017, the University of New Hampshire (UNH) Foundation invested $3.06 million investment into the Community Loan Fund. This was the UNH Foundation’s first impact investment, and its first investment directly into a New Hampshire organization or business. This total investment was one of the largest investments ever in the Community Loan Fund, and […]
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