Liquidity Shortage - LP/JV Equity on Ground Up MF
Is anyone else seeing an unprecedented lack of capital in this space? I still see some deals able to pencil out (primarily due to aggressive tax abatements, grants, etc.), but getting every excuse as to why no one is touching M.F. deals (especially dev and deal size under $50 million). Does anyone else feel like there is an opportunity to invest in this space because of the capital out there and the ability to stretch terms?
How do the aggressive abatements and grants work in this space?
For tax reductions, a project might not be profitable if it's taxed at the full rate right away. But it might work if the tax starts at half the rate and then gradually increases to the full rate over ten years (only way you can make most deals work in blue states). Grants can provide non-dilutive gap financing that would otherwise need to come from D/E. Big one is LIHTC, but for market rate units think historic TC, green incentives, public subsidies, etc.
Unprecedented? No. There was precedent about 15 years ago and I'm told it was much worse then. Yes, there is definitely opportunity to invest in essentially every space...the FED is literally taking money out of the economy and increasing borrowing costs to stop inflation...which means less projects are feasible and therefore won't get funded not just in real estate but every industry. If, for whatever, reason you have a line of billionaires, institutions, HNW individuals that have been miraculously unscathed by these rate hikes and are willing to back you, then yes, you should definitely raise a (vulture) fund, prey on the weakest, and squeeze every last drop of blood out of them.
Yes, seems like a huge lack of capital if you're building traditional debt/equity projects. Land prices are still crazy high in the markets I operate in and construction costs are high; need to see movement on one or both of those before we get back to a scenario in which most deals make sense without some other play involved.
It also sort of feels like a lot of money that might usually be a source of equity is preferring to sit around and "lend" at mid-teens mezz rates. As always, people pile into hot areas without realizing that if you're not one of the first actors, you won't make money - my anecdotal experience in raising money/trying to raise money the last 18 months is that everyone is sitting around thinking there is going to be some sudden rush of borrowers who just have to have expensive mezz debt, and that honestly doesn't seem likely.
I will say, when I talk to my friends who are still working in REPE, they have no shortage of opportunities hitting their desks asking for pref/mezz.
At what rate? I'd love to get mezz at 2021 rates... the 16% or so I'm seeing these days is basically just a way to hand the keys to someone other than a bank...
Couldn't agree more - seems like pref and mezz are back and lending with the same canned answer (only select developers/operators, geographies, etc.). You don't have to be a "vulture" to make out well in this market - just taking advantage of the lack of players. Curious if anyone has any insight into who is putting out money in that space.
Agree with others that it isn't unprecedented but yeah, most debt and equity is on pause. We're going to need a bit more certainty in interest rates and exit caps before they jump back in, IMO - hopefully early next year.
It could be a great time to be an operator with excess capital - earn 17-20% interest on gap funding during construction with an attractive forward purchase option. I hear wild terms being thrown out to get equity in the door & raw land off balance sheets (especially if encumbered).
Ut nemo perferendis numquam velit et. Facere quo quas aut reprehenderit. Deleniti velit totam ea beatae ea. Aperiam autem vitae aut sint sequi.
Dignissimos veniam veritatis commodi harum eos qui ratione. Consequuntur iusto maxime ratione iste aspernatur. Quia sint ea et culpa.
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