A more uniform understanding of these terms can be extremely useful in facilitating effective communication:
“Authorized Signers” means those persons identified as possessing the authority to sign investment approval and legal documents on behalf of the Investment Entity in its Operation Agreement, and listed in its Program Criteria.
“Capital” is the generic term used to describe funds used to complete a real estate development regardless of its source as Senior Debt, Subordinate Debt or Equity, and Developer cash.
“Capital Stack” is the totality of Capital committed and available to defray the cost of developing and completing a Project. Typically this is the sum of the Senior Loan total commitment, the Investment, and the Developer’s capital invested in the project. The total Capital Stack must always be, and at all times during the project remain, “balanced” (i.e., the total of all capital committed to the Project must equal the total cost of the Project).
“Credit Approval Authority” means those persons identified as possessing, and/or processes described as conferring, the authority to approve Investments in the Operation Agreement, and listed in the Program Criteria.
“Closed-End” refers to an investment Program under which the Investor and HC take all Project-Level cash received back to the Fund-Level until all initial Investments and preferred returns are received, with Fund-Level promote splits subordinate to the total Fund-Level Investment and preferred returns.
“Developer” means the established builder/developer who is seeking to obtain capital via an investment from an HC Program, for one or more of its real estate development efforts. The Developer can also be referred to as the “Sponsor” of the Project. Note that the Developer will typically hold title to each project in, and complete it through, a separate bankruptcy remote entity, which is referred to as the “Owner.”
“Direct Investment” refers to a type of Program through which Investor funds are deployed in the name of the Investor (as distinct from a Fund structured Program), and the Investor takes title to the Investment in its name directly. In these situations, HC assumes an advisory relationship to the Investor under the terms of an asset management or advisory agreement.
“Equity” is a particular type of Capital characterized by Investment Entity ownership of an interest in the Owner, with returns typically accorded through a preferred return and profits participation structure, and which may (but usually seldom actually does) include a pro rata duty to fund cost overruns. “Equity” also is commonly used as a synonym for “Equity Risk”.
“Equity Risk”means the high level of risk an Investment faces when it is used to supply Capital, and where the sum of that Investment and the Senior Debt constitutes a very high percentage (i.e., up to 98% or 99%) of the total cost of the Project. An Investment may be confronted with Equity Risk levels whether it is in an Equity, Structured Equity or Subordinate Debt form.
“Fund” means a particular type of Program implemented by creation of a separate legal entity into which capital is deposited, and which in turn becomes the investor of that capital in Projects that match the suitable Program Criteria designed by those depositing capital into the Fund. Funds can be structured as either Open-Ended or Closed End arrangements. HC and the Investor become co-venture (s) in the Fund entity.
“Fund-Level” refers to interaction of HC as the Investment advisor with Investors and others pursuant to the terms of the applicable Operation Agreement on issues related to one or more Investments in Projects. Fund-Level interactions typically involve accumulation, or roll-up, of data from several Project-Level Investments.
“Gap Financing” is typically an interim loan used to bridge the “gap” between the level of financing normally available to a Project at its existing stage of development, and that which is actually committed to the Project. This term is and can be used to describe a variety of circumstances; of particular import to HC is its use in the Community Investment arena, where it describes the additional Capital, above and beyond that which traditional underwriting conventions would allow, required to complete a Project possessing desirable community impact.
“Investment” is the deployment of Capital through an HC Program into a Project, and can include either Debt or Equity structures, depending on the situation and context.
“Investment Agreement” means the legal documents detailing the legal relationship between the Owner, the Developer and the HC Program in the course of closing an Investment in a Project. Investment Agreements can support either debt or equity investments. When a debt structure is contemplated, the Investment Agreement takes the form of a Loan Agreement and ancillary documents; when the transaction involves an equity investment, the Investment Agreement will usually take the form of either a limited liability company operating agreement or a limited partnership agreement. Note that the Investment Agreement document package supporting a debt Investment includes a significantly greater volume of documentation than does the typical equity structure.
“Investment Entity” means the legal entity through which each Program chooses to make approved Investments. In a Fund Program, the Investment Entity is created by HC and the Investor for the express purpose of making Investments. In a Direct Investment Program, the Investor takes title to the Investment in its name directly, and the relationship between the Investor and HC is the evidenced by a separate asset management or advisory agreement.
“Investor” means the capital provider who is supplying capital to a real estate development Project as an Investment through an HC Program.
“Market Rate” and “Market Rate Investments” refer to Investments that are underwritten exclusively based upon traditional criteria, including market strength, absorption and projected profitability, and without regard for community impact or other non-financial criteria.
“Mezzanine” and “Mezzanine Risk” are synonymous, and mean the relatively low level of risk an Investment faces when it is used to supply Capital, and where the sum of that Investment and the Senior Debt constitutes a lower percentage (i.e., up to 90% or 95%) of the total cost of the Project. As with Equity Risk, an Investment may be confronted with Mezzanine Risk levels whether it is in the form of Equity, Structured Equity or Subordinate Debt. The term “Mezzanine” is also sometimes used to describe Subordinate Debt.
“MSA” refers to “Metropolitan Statistical Areas” as established by the United States Census Bureau.
“Open-Ended” refers to an investment Program with a stated ceiling on total maximum invested funds, but where each Investment stands alone, and generates its own fund-level distributions (i.e., no “claw-backs” or other cross performance assurance elements are contemplated).
“Operation Agreement” means the legal document(s) detailing the relationship between HC and one or more of its Investor(s) in establishing and operating a Program to make Investments. If the relationship between HC and the Investor involves a Fund Program, the Operation Agreement will take the form of the document(s) that creates the Fund entity. If the Investment is to be made through a Direct Investment Program, HC assumes an advisory relationship to the Investor under the terms of an asset management or advisory agreement.
“Opportunistic” refers to a those Investments targeting an internal rate of return to the Investor that is greater than the level achieved in Value Added Investments. Currently Oppurtunistic yields should exceed approximately 20%.
“Owner” means the particular single-purpose bankruptcy-remote entity created by the Developer for the sole purpose of owning, developing and completing the Project.
“Project-Level” refers to interaction of HC as the Investment manager with Developers and others regarding issues related to completing a particular Project pursuant to the terms of the applicable Investment Agreement.
“Program” means the particular debt or equity investment vehicle sponsored by HC through which Investor funds are to be deployed. Programs reflect our approach to integrating the appetites of current or targeted investors with current market realities. Programs generally are structured to provide Investments either through a Fund or on a Direct Investment basis.
“Project” means the particular real estate development promoted by the Developer as the target for Investment by an HC Program.
"Rollup" means the process by which projected or actual cash flow information from several Projects are aggregated to present projection of the actual or projected performance of a Program.
“Senior Lender” means the provider of a (typically construction) loan the repayment security which includes a first deed of trust to the Project that is superior in priority to the HC Investment.
“Sponsor” is synonymous with “Developer.”
“Structured Equity” is a particular type of Equity that includes negotiated limits on the typical participatory return afforded Equity generally, usually in exchange for some negotiated limitations upon the level of risk attributed to the investment, including cost overrun protections.
“Subordinate Debt” is a particular type of Capital characterized by the status of the Investment Entity as the payee under a promissory note from the Owner, secured by either (or both) a deed of trust subordinate to the lien securing the Senior Lender’s debt, and a pledge of the Developer’s ownership interests in the Owner. Returns are typically structured to include a preferred return, and either some assured return or a profits participation element. Subordinate Debt virtually always includes cost overrun protections.
“Super Pads” are discrete development areas, usually in the form of a single large parcel of land, supported by master improvements, such as major roads and trunk utility distribution systems, but that lack final lot subdivision, interior streets and utility connection branches within the "super pad" area itself.
“Triple Bottom Line” refers to a methodology for assessing the merits and performance of a Project that separately computes the dollar amount return on investment generated, the social impact or performance of the Project, and incorporates environmental sustainability.
“Value Added” refers to those Investments targeting an internal rate of return to the Investor that is less than the level achieved in Opportunistic Investments, but greater than more traditional types of investments. Currently Value Added yields should range between approximately 14% and 19%.
“Workforce Housing” describes for-rent and for-sale housing developed for residents who work in the communities in which the housing is located. Typically this means occupancy costs that residents earning 80% to 100% of the MSA median income can afford.