case study
Artifact
Overview
In late 2019, ACI was presented with the opportunity to invest in the acquisition of a residential estate project in New York City.
The opportunity featured well above average returns for the sector due to special tax credits offered by the city. ACI’s close relationship with the developer allowed ACI to create a unique investment that generated asset-backed current income and equity-linked upside participation, while providing fast and creative capital solutions. An enhanced mezzanine structure allowed overall greater returns for the project developer and duration and risk-reducing current income for ACI. Ultimately, ACI’s loan was refinanced, allowing capital to be redeployed in another opportunity with the same development group. The favorable equity-enhancing structure created by ACI created additional investment opportunities with this partner.
Thesis
The strong know-how of the developer coupled with extremely favorable tax-incentives and income-generating nature of the property made this investment a strong candidate for asset-based lending approach. While the developer was initially looking for equity capital, ACI believed better returns and risk/reward profile could be achieved using an enhanced mezzanine-like debt structure. The downside protection, current income, and fast return of capital through tax-incentives created outsized return potential.
Structure
Rather than invest direct equity into the deal, ACI created a unique structure that allowed the fund to invest in collateralized debt, with a current income, and an equity-linked upside. The terms were structured as follows:
$1MM note.
15% annual cash-pay interest, paid quarterly.
15% equity participation in deal.
Return Profile
| 66.6% | 5/30/2023 |
5/30/2024 |
5/30/2025 |
5/30/2026 |
5/30/2027 |
|---|---|---|---|---|---|
| $1MM | 107.1% | 80.7% | 65.9% | 56.3% | 49.6% |
The Edge
ACI’s strong relationship with the developer and deep understanding of its business and goals allowed us to create a more competitive, de-risked investment that created higher returns for both shareholders and equity holders.
ACI’s understanding of unique tax structure opportunities and support of developer to continue utilizing similar incentives.
Full principal and interest repayment.
ACI retained an equity kicker with no capital at risk.