WSO -
Was curious if anyone could go over some of the differences between balance sheet lenders and debt funds. I'm new to the RE world and would love to learn from some of the more experienced guys out there.
Few things that come to my mind:
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Modeling: BS lenders usually take senior positions, debt funds might do similar mortgages, but they're also jumping into mezz and pref. positions. Accordingly, you're looking at IRR at the fund, and probably less conservative on growth..
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Risk: I'd imagine debt funds are going to be looking at hairier deals, which leads to:
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Pricing: BS lenders are going to be cheaper than debt funds, both of which are more expensive than LifeCo and CMBS. Obviously this relates to what position you are in the capital stack and the type of asset (e.g. core, core-plus, etc.)
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Day to day function: Less regulation at debt funds? I'd imagine so compared to banks. So maybe less administrative work? But possibly more on a relative basis (i.e. debt funds are leaner = less back office staff than banks).
Please feel free to correct me if/where I'm wrong or off and expand on that which I have missed!
Overall, you have 90%+ of it.
BS lenders do a lot of construction lending (recourse and non recourse). Debt funds can do construction but I've found they tend to shy away due to lower overall ptofitability. Banks can have mezzanine groups but are definitely more focused on senior debt while debt funds like to take positions with higher yields (junior, distressed, B piece etc.)
Pricing certainly depends. At my bank, we beat LifeCos all the time on pricing because we have a lower cost of funds but rarely compete on proceeds.
Regulation is horrible at banks rn.
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