Where are you guys seeing pricing for this lately? With debt funds looking at 400 bps + now and the agency market taking off Pref is looking much more attractive for lenders. We saw deals pricing at 13.00%, 85% LTV a couple weeks ago. I assume due to the lower levered seniors, we could start seeing equity returns in this space once you get to the top of the stack
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Seeing pref/mezz being priced from 11%-13%. With some LP's being skiddish and lower leverage provided by seniors, I believe pref/mezz is positioned well for this cycle.
Could you elaborate on "mezz/pref being well positioned" for this cycle? Does this mean the spread between senior and subordinated debt has shrinked?
Sorry, am still a student.
Seniors are lending lower in the capital stack, a senior that would typically be 70-75% is hitting 60-65 now. This provides a need for more equity and pref/mezz essentially come in to fill that gap. Post Covid plenty of debt funds were pricing only just above Fannie/Freddie and lending up to 80%, which made the need for pref/mezz miniscule.
Well positioned for existing deals and already placed debt. Not to say mezz and pref are not great places to be now either.
When you lend to the sponsor in the mezzanine position you assume a % loan to value and the sponsor's actual equity or mathematically derived equity. Let's say for a new acquisition on a transitional property the value of the property is $100, you have a senior lender who will go up to 60% LTV or 65% LTV, so their basis is 60 or 65 buck of your 100 bucks. Mezz lenders will come in from 65% to say 85% leaving the owner with 15%. Now what happens when values decline, either from business plan or capital market events. well let's say that values drop 15%, well now you are under water. If you get to a term of your debt, 3-years and you don't execute your business plan and you don't meet extension options, well then the senior mezzanine lender can foreclose on the equity piece and take over ownership.
I lost some steam on this, but let me know if you have questions.
For affordable, 9-12% non recourse. Up to 95% LTV
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