RE PE to CRE Debt Fund and Back
I have been offered a job at a cre debt fund, after a few years would it be possible to swap to re pe (I've already done two internships previously)
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I'd personally stick in REPE. Once you go debt you never go back.
I've seen people switch from debt to equity at various stages in their career with the exception of very senior people. Best not to speak in absolutes
REPE can refer to debt or equity, not exclusive to equity. You can switch from a debt fund to an equity shop after a year or two if you want to. You'll get experience working with complex capital structures, legal knowledge, will see plenty of deals, all of which is helpful on the equity side. The debt funds I'm familiar with run discounted cash flows to value transitional assets/portfolios, unlike senior lenders so their valuations are more in line with equity shops albeit more conservative u/w given the capped upside.
If it's an active firm with a solid team, I'd say go for it.
Hi, you mentioned debt funds using dcf to value properties, what do senior lenders use- comparable sales, replacement cost? Thank you!
There might be a couple of exceptions to this, but generally senior lending utilize a direct-cap approach. They essentially project an "as-stabilized" net operating income and place a cap rate on it, ignoring time value of money.
Got it. Thank you! Where do you think senior lenders get cap rates from? Comparable sales, historical market data? And I would think direct cap will work best when there the property is stabilized and there is not going to be significant change to NOI because of rehab, but what do senior lenders use when there is signficant rehab required or when its a ground up construction/development?
From the most comparable recent sales data available. If none is available, you pull from submarkets with similar market stats and fundamentals (i.e. if the subject is located in suburban Atlanta, where no trades have taken place in recent years after a run-up in rents, then you would pull from another suburban Atlanta submarket with similar market stats and fundamentals).
Direct cap is fine for stabilized properties as in theory the cap rate should equal your unlevered discount rate in that instance, but an investor is generally not taking debt fund capital for stabilized properties/portfolios unless there is a ground-lease, significant near-term rollover, or a complicated in-place capital structure. Banks and lifecos offer far more competitive rates than debt funds for true stabilized product. Senior lenders still use direct-caps for transitional assets, or ground-up construction projects. It's not the most precise way to place a value on a deal, but nonetheless, it's what a majority of them do given there deal volume.
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