Equity’s residual claim is important for two reasons: equity will command the highest cost of capital, but equity also has unlimited upside. Equity will command the highest cost of capital because it gets its money back last, after all debt and preferred equity. Yet because it is last in line, it gets everything that’s left.
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Series on the real estate private equity M&A process, a common arc within any real estate private equity career path. At this point, we know that a company is worth buying if its net asset value (NAV) is meaningfully above the current share price. To know NAV, simplistically put, you need to know the value of the debt and the gross value of the assets.
Leveraged Breakdowns offers the best real estate private equity course for anybody looking to break into the industry. We were once outsiders at non-target universities. We had to fight our way into this extremely exclusive industry. Through this process, and our subsequent years in the industry, we have learned how to navigate the interview process.
A capital stack is really just a company’s enterprise value, shown layer-by-layer. If you don’t know what enterprise value is, Google it. REPE investment memos will always show a capital stack. This is a staple that you learn to build rapidly. We’re going to build this together in real-time because I want to show you my process.
A lot of my readers naturally want a successful career in repe. Most of them are also pretty junior, meaning they’re either undergraduates, business school students, or junior analysts in feeder roles such as investment banking or commercial brokerage. I figured it might be helpful if I try to put together a list of the traits and qualities I’ve seen in the best analysts I’ve met during my career in real estate private equity.
REPE acquisitions, stabilized properties are further along the life cycle, since they exist already and have in-place tenancy. That said, there is much less guess work involved with stabilized underwriting. On the expense side, you’re already incurring expenses so you know how your opex line will appear.
Concessions are a critical line item in any real estate model. Concessions frequently show up in multifamily underwriting. If you work in a real estate private equity job focused on longer-lease buildings, the same concept is often referred to as free rent. Regardless, real estate private equity firms would certainly expect you to understand concessions before you walk into an interview.
Cap rates can vary widely across investment strategies, across property types, and across geography. It will take some time for these nuances to become second nature, but the formula itself should be intuitive. You should also be able to do the math in your head very quickly.
