Just curious what folks are seeing out there in terms of pricing/terms for preferred equity positions. I am specifically looking at value add multifamily, and seems like there is an abundance of pref equity investors in the market. I have heard several stories of firms pitching JV equity when really they are doing mainly pref.
Using round numbers, assuming a $100 total capitalization with a $60M debt piece, is it reasonable to assume that a pref equity investor could come in for $20-$25M and reduce sponsor's requirement to $15M-$20M?
What sort of pricing is out there? Would pref piece require all free cash flow to be swept to them during the hold period until they hit some hurdle? Or could it be structured with a lower current pay coupon so sponsor could still generate some cash to them before a capital/sale event?
What you anyone want pref equity that ends at 75% LTV/LTV ? I’d rather pay a senior note/ coupon I.e. 4-5% than 10% pref.
Pref historically likes to go up to 85-90 percent Of the capital stack
Obviously they would not use pref for the full loan. It would fill the gap above a senior.
Yes I am talking about 60% senior debt and then up to 80-85% LTC from preferred equity provider.
I am just trying to understand if that tranche of capital is purely IRR driven, and would they go prorata on net cash flow during hold period or require that every dollar go to them until they hit their hurdle (ie sponsor gets nothing until capital event/sale?
Typically IRR driven with 100% of operating distributions and capital distributions going to the preferred equity until their accrued pref is repaid.
Pref return can be anywhere from 6-15% depending on the asset/project and size of commitment.
We recently had a quote for a larger deal to get to ~70% LTC and the Pref was 11% while the project was under construction and 9% at TCO. We also got the pref equity to fund pari passu with the senior (as there was another whole loan solution that they were competing with).
Those are favorable terms due to the larger project size and 70% LTC.
We've seen some pretty big shifts in favor of the borrower over the last several months. If you have a project in a desirable location for multifamily you're going to get pretty cheap debt.
Can you share approx how large the loan was?
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