Reading on PIK debt?

What are you trying to learn? Not really all that much to write on the topic. Real estate is meant to be a solid, cash-flowing asset, so you're most likely to see the equivalent of a PIK feature on debt for properties in transition or construction. Usually it will be structured as an "interest reserve" or holdback.

In other words, if the property is being acquired today for $100 and the business plan entails putting another $20 into improvements and capital costs, the lender might size the total loan to $80 but only fund $50 upfront. The remaining $30 will be disbursed to cover project costs and pay interest (which effectively results in PIK-ing, since the loan is paying itself). The expectation is that the project will be cash flowing once the reserve is fully funded, or else the sponsor will have to either put in more equity or face a default.

A client has a large PIK investment and I am trying to figure out how to value it. I traditionally work with senior mortgages or mezz and am unfamiliar with paid in kind debt.

What you described sounds like a traditional senior mortgage holdback (TILC, capex, earn out, etc). But usually in these cases interest isn't paid on the debt until it is drawn upon, even if the interest is paid out of an interest reserve line item.

What I am looking at now is an '07 vintage deep mezz strip that was converted to PIK when there wasn't enough cash flow. The interest is accruing on the face amount but will only get paid out to the extent proceeds are available upon the sale of the asset.

I just want to make sure I am knowledgable when I'm asked about it.

BlanksterA client has a large PIK investment and I am trying to figure out how to value it. I traditionally work with senior mortgages or mezz and am unfamiliar with paid in kind debt.

What you described sounds like a traditional senior mortgage holdback (TILC, capex, earn out, etc). But usually in these cases interest isn't paid on the debt until it is drawn upon, even if the interest is paid out of an interest reserve line item.

What I am looking at now is an '07 vintage deep mezz strip that was converted to PIK when there wasn't enough cash flow. The interest is accruing on the face amount but will only get paid out to the extent proceeds are available upon the sale of the asset.

I agree, that sounds a little different from what you're describing, but what you're describing definitely happens in real estate sometimes. And, to his credit, what your'e describing would only take place if the property were "in transition" as he put it, which would be a euphemism for what's going on with the asset in question.

Valuation would just be run as a DCF with a timeline of bullshit assumptions, like anything else. Don't overthink it.