Recap equity vs. fresh equity: when does each fit a CRE deal?

When sponsors run a recap and how the lender experience differs

Recap mechanics: a new equity investor (single LP, fund, or syndicate) buys out some or all of the existing LP base at an agreed value. Often paired with a senior refinance because the new equity check is sized to take out departing LPs plus any incremental cap-ex or distribution. The GP frequently retains the promote and operating role.

When recap fits: the asset is performing, existing LPs have hit hold-period limits or want liquidity, the sponsor has a continuing operating thesis, and the new equity check produces better entry economics than waiting for a sale (avoiding broker fees, market timing risk, transaction taxes).

Tax treatment: recap proceeds to departing LPs are taxable to those LPs as a partial or full disposition of partnership interest. A 1031 exchange is generally not available for partnership-interest sales (the relinquished property is real estate, not a partnership interest). Departing LPs often defer gain via OZ if the deal qualifies. Bring in tax counsel early.

Fresh equity for new acquisitions: standard new-deal model. The sponsor sources the deal, raises equity from a syndicated LP base, places senior debt, and closes. The waterfall and operating agreement set the economics for the new deal and its hold period.

Lender perspective: recap requires senior lender consent (the new equity coming in often requires control changes at the borrower level that trigger transfer-and-assignment provisions). Some senior loans permit recaps with notice and qualifying-LP standards; others require full consent and may use the consent right to retrade pricing.