What is White Knight Pref Equity?
White Knight Pref Equity is the investment of new funds into a capital stack by a friendly investor to solve a refinance or other shortfall. It is the opposite of bottom-fishing or vulture investing or loan-to-own.
How does it work?
Say for example you have a property where changes in cap rates and LTVs leaves your refinancing short by $10 million, the White Knight Pref Equity funds the gap.
Why be a White Knight?
For example, a pension fund real estate investor that I work with had a problem. They buy or JV on existing and to-be-built low/mid-rise residential rental properties and BTR projects. The market for that product is extreme competitive and even paying market rates, they kept losing deals to other buyers – even at the same price. Last to play golf with the broker got the deal.
Their solution – offer favorable terms for White Knight Pref Equity in return for a Right of First Refusal. The property owner receives favorable, even below market funding, The lender receives an acceptable rate of return and is first at the table in the event of a sale.