Is Rescue Capital Rescuing the Borrower or the Lender?

by: Eleni Zarokian

Rescue capital is a type of financing injected into distressed properties to support their business plans and prevent foreclosure or bankruptcy when traditional funding isn’t available. The primary goal of rescue capital is to stabilize the asset, allowing for refinancing or sale in the future. Given the complexity and risks associated with such funding, it is essential for borrowers to carefully evaluate their options, often with the guidance of experts like Lever Capital Partners, to ensure that the decision aligns with their long-term business objectives and does not result in further financial strain. Lever Capital Partners can help evaluate the current market options to ensure informed decisions and avoid further financial pitfalls.

Rescue capital can take various forms: first mortgage debt, mezzanine financing, preferred equity, or joint venture equity. Deciding to use it is often challenging, especially if you’ve signed recourse on the existing loan and feel cornered into borrowing expensive capital as your only escape from recourse. In such cases, it might seem like the only viable option to salvage your investment.

However, if you have a non-recourse loan, you might consider handing back the keys rather than taking on the risk of expensive borrowing. The goal is always to use the capital to stabilize the asset, and then refinance or sell it. At Lever Capital Partners, we help borrowers determine what options are available and strive to find those that align best with their business plans.

What Type of Rescue Capital Makes the Most Sense in Today’s Economic Environment?

• Debt: Suppose you’re about to finalize an acquisition with bank financing, but just weeks before the closing, the lender’s credit committee rejects your deal because it doesn’t meet the new, stringent guarantor criteria. In this situation, rescue capital in the form of debt could bridge the gap, allowing you to close the deal. 
• Mezzanine/Preferred Equity: Imagine you’ve completed your development, but leasing is progressing slower than anticipated, and your construction financing has depleted all the reserves. In such cases, secondary financing like mezzanine or preferred equity can provide the time necessary to stabilize the asset until you can refinance it.
• Equity: Consider a scenario where your existing loan is maturing, and refinancing isn’t an option due to high-interest rates. Your current lender may agree to extend the loan but requires a cash infusion to reduce the loan balance. Here, rescue equity can facilitate the loan extension, ensuring continued ownership and operation of the property.

When Not to Use Rescue Capital

Rescue capital isn’t a one-size-fits-all solution. It’s crucial to recognize scenarios where it might not be suitable:

• If your plan will take years to execute, the cost of borrowing could outweigh the benefits over a prolonged period.
• If rescue capital will significantly dilute your equity, it might jeopardize your investment’s long-term viability.
• If it will consume all cash flow, making it difficult to manage ongoing expenses and operational needs, it’s likely not a feasible solution.

Who Are the Capital Providers and How Can LCP Access Them?

Understanding who provides rescue capital and how to access it is essential. At Lever Capital Partners, we analyze all available options to determine the most viable sources of rescue capital. Our extensive network and industry expertise enable us to connect you with suitable capital providers, helping to mitigate risks such as making capital calls to equity investors or losing your property altogether.

We carefully evaluate whether the available rescue capital is a good fit for your project, ensuring that you make informed decisions in today’s unpredictable market. Our knowledgeable team is dedicated to finding the best solution for your situation, providing you with the stability needed to navigate economic uncertainties.

While rescue capital can be a lifeline for distressed properties, it’s essential to thoroughly evaluate its implications. Lever Capital Partners can guide you through this complex process, ensuring that you make decisions that align with your long-term business objectives.