In the field of commercial real estate investment, equity is one of the principal elements in the decision making process in whether to acquire or develop an investment property.  As an investment advisor to our clients, Capital Realty is frequently asked to secure equity for various real estate projects.  Our sources for equity include private investors, institutional investors such as pension funds, as well as our own correspondent life insurance companies.
Equity can be in a variety of forms but is usually provided by joint venture ("JV") partners where the money partner takes an actual ownership position in the project and shares in the profits -- and losses -- of the property for the holding period.  A typical JV would be where a money partner provides the cash and the developer partner provides the experience and expertise and they are combined to (hopefully) generate a successful real estate investment.  Not all JV’s, however, work out successfully and that has led to the “classic definition" of a JV as one where, at the beginning of the project, the investor has all the money and the developer has all the experience and by the end of the project, the investor has all the experience and the developer has all the money...
JV’s are typically more time consuming and costly to structure than straight debt, and therefore some of our life company investors have elected to provide the required equity in the form of a “participating” loan where there would be a normal fixed rate “A Note” plus a second “B Note” which carries a participation feature in the cash flow and residual.  The total funds provided in this type of arrangement can frequently approach 90% to 95% of the project’s total costs.  In a participating loan, however, the property is fully owned by the developer and any losses, including depreciation (shelter), flow through to the developer rather than to the investor.  This type of financing is frequently found in speculative or partially leased properties such as office, retail, or industrial properties.