Curious on the differences between these various types of fund-level credit facilities utilized by RE debt funds.
- Subscription Facilities (sublines): More familiar with these; loan is secured by the commitment of the investors in the fund. Normally banks will size the loan availability to say, 90% of uncalled commitments from "Included Investors." Or for lower-credit investors (HNW, etc.), maybe a lower advance rate (i.e. 50%). Real Estate Equity funds use these as well, not just debt funds. Priced in the SOFR + 200 range as of today, plus or minus. 2-3 year initial terms with extension options. Provided by a lot of the big name banks as well as smaller commercial banks. Bank group often syndicated for larger deals.
- Repo Line / Warehouse Line: Are these the same as each other, or different? Don't know much about these. My limited understanding is this type of credit facility is tied more to the actual investments in the fund (i.e. loans on buildings). So in theory, they line lender could have a mark-to-market which can hurt the fund Sponsor if property values have fallen (margin call). Seems like providers are more limited to the IB's of the world (Goldman, Wells, Morgan Stanley, etc.)? Where are these typically priced? How is overall loan amount/leveraged/advance rate determined - a max % of fund asset value?
General question - how would a debt fund decide which type of credit facility to utilize? In other words, how are the 'uses of funds' different for each credit facility? Assume it depends on the fund strategy, but is one line used more when you want to draw down the line and hold the debt long term until exit/maturity (juice returns), vs. another line is more of a short term thing that you draw down as working capital to fund loan originations, but pay down periodically (like a credit card?)
Know this is a loaded question/topic, so any insight is appreciated.
Note - not talking about asset-level debt financing (loan on loan, A/B, mezz, etc.), just fund-level lines of credit.
Also, I looked at this topic before posting: https://www.wallstreetoasis.com/forum/real-estate… and found the comment by @itsanumbersegame helpful for laying out the different types of debt fund 'types' and strategies.
Bump
Great question. Following.
It’s common for debt funds to rely heavily on capital markets + leverage to reach their target return profiles. A typical way to do this would be to originate loans, hold them on a warehouse line (using repurchase agreements, hence the term “repo line”), and then once the total balance drawn on that line approaches the limit, structure and issue a CRE CLO that effectively buys back the loans from the warehouse line and securitizes them (clearing the line). Cash effectively flows from investors buying the bonds from various tranches back to the warehouse line lender to clear the line. The fund manager will hold an equity piece when they are on the warehouse lines, and then will typically hold the equity tranches of the CRE CLO once issued. Some repo lines are mark to market and others are not. Depends on the line lender.
This is very helpful, thanks. Generally speaking, for how long would the debt fund warehouse the loans on the repo line? I assume it depends on several things (like how long it takes to aggregate and issue the CLO), but curious of the general range.
Purpose of subscription line is really for capital calls. I.e. a deal closes and you can call on the subscription line immediately, and then put together a formal capital call for your investors and call capital 10 days later and then repay the sub line. Some PE firms have used this to artificially bloat IRR or to smooth capital calls by using the sub line for 90 days at a time and then repaying.
Warehouse lines can be short term need to aggregate to CLO or as a standalone financial instrument. A lot use them as leverage rather than to aggregate to CLO. They are mark to market, typically anywhere from 25-100% recourse. 8 months ago they were 65-70% at 150 over. Today probably 65% at 250 over (or banks aren't opening them). Typically show the lender a profile of your deal and they can quickly say yes or no to adding to facility.
Also very helpful, thanks. The recourse part is interesting (I just assumed non-recourse for some reason), but makes sense you'd want a solid guaranty from a solid Sponsor (w/ liquidity) given the facility is mark-to-market.
Maybe a dumb question, but would a real estate equity fund ever use a warehouse line (for leverage). I assume not, since they already have the project-level debt, but curious if people ever 'double-lever' using both project debt + fund level debt.
As mentioned, equity funds will use "subscription lines" to close deals before calling capital. In terms of an actual warehouse / repo - yes if they have a debt strategy within the fund (not many) or they'll have a warehouse aggregation line for aggregation strategies. E.g. you have a business plan to aggregate mom-and-pop self storage deals and need the ability to quickly add them to a debt pool prior to getting a full, crossed financing or some type of securitization execution. They're typically floating, some recourse, and a relatively "quick add" from the bank (show a quick profile of the deal and then fill out a 2 page addendum to add the asset)
Bump
Following as well
Velit recusandae dolores sed qui ut enim et. Velit rerum et sit provident et.
Harum culpa voluptatum dolorem id quidem repellendus. Consequatur impedit quis corrupti qui eligendi sed. Voluptatum labore magni perferendis commodi asperiores ducimus quia.
Qui quo reprehenderit officiis consequatur dolor. Ea non rerum molestiae voluptas sunt non odit.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...