Rescue capital: equity for a refinance that falls short

When a loan matures and the new loan sizes smaller than the old one, someone has to fund the difference. That shortfall is often called the refinance gap. Rescue capital is the equity that fills it. It can preserve ownership of a good property through a hard moment. It also comes with terms that deserve a careful read before anyone signs.

Why refinance gaps happen

A property can be performing and still fail to refinance at its current balance. The common causes:

• Rates are higher than when the original loan closed, so the same income supports less debt.
• Lenders have tightened leverage or coverage requirements for the property type.
• The appraised value has come down, even if occupancy has held.
• The business plan took longer than expected, so income has not reached its target yet.

None of these mean the asset is broken. They mean the capital stack no longer fits the property as it stands today.

Where rescue capital comes from

Existing partners

The first call is usually to the current investors. A capital call, if the operating agreement allows one, keeps the ownership group intact. Partners who decline to fund may be diluted, depending on the documents.

Preferred equity

A new investor contributes capital that sits behind the senior loan and ahead of common equity. It typically earns a preferred return and is paid back before the original partners receive distributions. Preferred equity often carries rights that let the investor step in if the plan goes off track.

New common equity or a recapitalization

A new partner buys into the deal alongside existing investors or in place of some of them. This resets ownership percentages. It often resets the sponsor's economics as well.

What the terms usually cover

Rescue capital is priced for the moment it arrives. Investors know the sponsor has a deadline. Expect to negotiate:

• Priority. Where the new money sits relative to existing equity, and whether it is repaid first.
• Return structure. A preferred return, a fixed multiple, a share of upside, or some combination.
• Control and remedies. Approval rights over major decisions, and the right to replace the manager if defined triggers occur.
• Term and exit. When the investor expects to be repaid, and what happens if the property is not refinanced or sold by then.
• Lender consent. The senior lender usually must approve the new equity and any related intercreditor or recognition agreement.

Read the remedies section closely. That is where a sponsor can lose the property they set out to save.

How to put yourself in a better position

The best rescue capital is raised before it becomes a rescue. A few habits help:

• Track maturity dates and run a refinance test 12 to 18 months ahead.
• Know what a lender would size today, not what the last loan sized.
• Talk with existing partners early so a capital call is not a surprise.
• Keep a clean package ready: rent roll, operating history, budget, and a credible business plan.
• Ask the current lender about an extension or modification before assuming new equity is the only path.

Time is leverage. A sponsor with six months of runway has more options than one with six weeks.

Questions to answer before you commit

• Does the new capital close the gap fully, including reserves and closing costs?
• What happens to each existing partner's position under each scenario?
• Can the property realistically refinance or sell in time to repay the new investor?
• Is there a cheaper alternative, such as a partial paydown, the sale of another asset, or a loan modification?

If the honest answer to the third question is uncertain, a sale may be the better outcome for everyone.

Our loan maturity tool helps you see when a gap may appear and how large it could be. If you are facing a maturity and want a discreet view of your options, contact our team.

Thomas Capital Holdings does not sell securities or solicit investors. Any equity investment is made by the issuer under its own documents and applicable law.