This is the first in a two-part series on net asset value credit facilities backed by a commercial real estate portfolio. This Legal Update focuses on structural considerations in obtaining equity pledges in these types of facilities. The subsequent installment will address capturing cash flow value while the loan is performing.

Introduction

Net asset value (“NAV”) credit facilities backed by a commercial real estate (“CRE”) portfolio held by a private investment fund (a “Fund”) present structuring challenges distinct from private equity NAV financings. CRE portfolios are typically held through multi-layered structures and often subject to mortgage and mezzanine indebtedness, joint venture (“JV”) governance, property and investment management fees and complex distribution waterfalls. These CRE portfolio features affect both the potential collateral options and cash flows in connection with a NAV credit facility provided to a Fund (a “CRE NAV Facility”).

The complexities of structuring a CRE NAV Facility come with real opportunity. With exit and refinancing markets constrained, many real estate funds are holding assets longer than planned and seeking additional liquidity sources to support existing assets or to fund capital expenditures. CRE NAV Facilities meet that need, and, for lenders, they offer access to diversified, income-producing portfolios with meaningful structural protections. With careful diligence and structuring, lenders and sponsors can pursue this opportunity while managing the complexities that multi-layered CRE portfolios present.

This Legal Update focuses on a central structuring challenge posed by CRE NAV Facilities: obtaining equity pledges that provide practical control upon enforcement. The strength of the equity collateral package is a key factor in whether the facility offers meaningful benefits to both the Fund and potential lenders.

Equity Pledges: Optimizing the Collateral Package

Collateral options under a CRE NAV Facility are complicated by the fact that real property is rarely held directly by the Fund and...