Mezz/pref in 2023
Client of ours has a deal they are pursuing, about 300 units in the sunbelt for $35mm with $3mm in cap ex. They have a lender willing to do 75% of the project, but they've only raised a little over $4mm in equity. They've asked us about bringing in some pref/mezz, which they seem to think they can get for 10-12%.. Sounds crazy to me, too low. Anyone see those types of terms these days?
I believe Freddie has an affordable product that can go up to 85% which may initially qualify here but long term that program won't work with the sponsor's business plan.. So trying to think of another option
Depends on the deal profile of course, but 10-12% for going up to 90% of the capital stack (and starting at 75%) sounds crazy to me as well. I'd think more like 14 - 16% honestly, if not with some upside participation as well given you're so high up in the stack. For 10-12% I'd be thinking a pref/mezz piece that probably only goes up to ~80% of the capital stack for a somewhat bullet proof deal
Agree that 10-12% for the 76-90% slug doesn't sound compelling in the current environment.
There is a lot of money raised around these strategies currently and construction MF mezz was in the 10-12% context prior to the rate shock so I think people will be willing to provide that capital on quality assets.
For the deal above, I have got to imagine there is family office type money that would be willing to do $4-$5m pref/mezz at 12% (likely some cash pay & PIK).
Can't speak to the pref, but you're not going to find a product that gets you to that kind of LTV unless it's truly affordable housing, and not the typical sunbelt "workforce housing" which is non-premium apartments that rent at a major discount such that they're "affordable", not Affordable with a Capital A.
Or a single family home, I guess.
That mezz coupon is out there, but not at that attachment point / last dollar LTC. You can get 8% fixed-mezz but it needs to be behind a 35% LTC senior and cut off at 60%-65%. For an 80%+ LTC cutoff that's attached 70%-75% you're looking at a coupon/preferred rate of 14%+.
15%. Senior debt is clipping 8-9% today. You’re not getting 10% mezz. Few years late.
Is senior debt really that high right now?
Sofr is/will be 5%. Legit morons are writing 12% mezz. Actually funny to see
I work for capital provider. Pref is reaching around 13 - 15%, at low to mid 80's. We haven't even been quoting deals at the 90% mark.
Our standard mezz rate is 12%.
Pref for sure looking in the mid-teens but you could negotiate a current pay that is much more favorable. Say the business plan is to ReFi/Sell in year 3, negotiate the pref term to be 3 years with a current pay that allows the sponsor to debt cover and execute on their CapEx.
I'm surprised they're getting 75% LTC on the deal, are you sure they have a term sheet. I've heard of things starting at 65% LTC and now maybe going to 50% LTC if you can get a loan even but that's for ground up development. On the pref side I've heard of 12% the lowest with 6% current minimum but that also depends on the cost of capital/what investors will want minimum.
That's what I said - The 75% LTC is supposedly from a natl bank but I have not seen the term sheet
We also provided agency quotes closer to 55%, so I told them to take the bank loan, significantly better priced (supposedly) than any combo of agency/mezz they may be able to obtain
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