Debt Fund Leverage
Hi all currently work at an equity and high yield debt provider. We are looking to maybe go into the multifamily bridge lending space. I am looking to develop a model with a note-on-note financing structure. Have a few questions for the debt fund guys here on how to model this out and what to be looking for here. We have historically taken everything down on our balance sheet but on senior side would want to juice yields.
1. What kind of returns can i expect with this additional leverage, is this significantly lower the the CRE CLO structure where the originator keeps the B-piece and sells of the A? Really we are targeting yields in the 12%+ range. Is this even possible without running it as a fund and charging fees?
2. Is there a typical debt fund structure that most use to finance these types of deals to generate the highest returns?
Avoiding CLOs as we do not have the capacity to run securitizations with the current size of our team and do not want to run into additional mark to market risk.
Bump - I have always been curious what this structure looks like.
While I can't speak directly on CLO, I did work at a private credit fund who used a note-on-note structure. We had a handful of warehouse lines with banks or family offices that would allow us to lever our note up to ~80%. We paid interest at slightly above market (~WSJP+1-2) on our note and charged a handful of points higher on our underlying senior + origination/exit fees. All in, we retained debt service, fees, etc. from the senior while only putting in a fraction of our balance sheet. All in yield was constantly 20%+, but this was a specialized product that we were very selective on. The main downside was that our credit box and our warehouse line credit box frequently differed, causing us to lose good deals.
I think above is pretty much the standard. Set up an SPV to put the bridge loans in and then you can borrow against that at the SPV level (the lender will tell you exactly what you need to do). If you are borrowing 75%+ then you're probably going to need a non-bank lender and will pay SOFR + 5 handle most likely. A lot will depend on what LTVs you are bridge lending at. It's been a while since I did anything like that, but 12% seems a little low for interest yield on that product, especially in the current environment.
To #1, CRE Debt Funds today are levering new investments/positions somewhat in the 70%-80% advance range and getting priced by WH providers in the 170-190 spread range. With that kind of leverage, assuming you are pricing deals somewhat in the 300-350 spread context, you should be landing in the ~11-13% return range, GROSS (assume no fund structure). If you bake in fund expenses/charges, i.e fund structure, you're probably losing 1-2% to gross returns and getting to around 10% Net. Truth be told, each fund has its own/differing fee structure so multiple shops running/UW the same investment could land differently.
To #2, not sure If I'm getting the question right, most closed ended CRE debt funds are structured as REITS.
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