5 Comments
 

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.

 
Best Response

Ah I see. Yes, pretty unusual circumstance here and not what you'd see in newly originated debt. Basically sounds like a form of hope note. There's been some recent press on hope notes due to some of the earliest forms in the last cycle seeing some payoffs, but as a whole not a lot of dedicated literature to my knowledge.

As a matter of discussion, it would seem unusual and problematic for a restructuring to contemplate the face amount of deep mezz converting to PIK and accruing senior to the newly restructured equity...as you would retain the same basic problem of all overlevered real estate: the ownership responsible for putting in fresh equity is underwater and has no incentive to advance capital to protect intrinsic value.

A solution that I've often seen is where the hope note is structured in a manner such that it shares in profits AFTER the new equity has achieved a target IRR or profit (hence "hope note," since there's often little chance the note will find itself in-the-money).

 

Molestiae quia unde earum officiis sit quaerat. Voluptas earum voluptatibus voluptas dolores. Impedit est delectus qui quia cumque cumque. Neque quam illum sint excepturi dignissimos nulla aut. Magnam voluptatem ea veritatis ipsam voluptatem. Est ea est fuga ad.

Minima reiciendis et perspiciatis animi tenetur ea doloribus. Reiciendis ut cum molestiae excepturi aut. Ad distinctio nulla enim cumque. Aut id nam iste blanditiis libero. Et natus molestias eligendi quia non animi.

Career Advancement Opportunities

June 2026 Investment Banking

  • Evercore 01 99.4%
  • Moelis & Company 01 98.8%
  • JPMorgan 01 98.2%
  • Guggenheim Partners 01 97.7%
  • Morgan Stanley 07 97.1%

Overall Employee Satisfaction

June 2026 Investment Banking

  • Moelis & Company No 99.4%
  • Morgan Stanley 01 98.8%
  • Evercore 01 98.2%
  • BMO Capital Markets 12 97.6%
  • Banco Santander 01 97.1%

Professional Growth Opportunities

June 2026 Investment Banking

  • Moelis & Company No 99.4%
  • Evercore No 98.8%
  • Morgan Stanley 05 98.2%
  • JPMorgan No 97.7%
  • BMO Capital Markets 12 97.1%

Total Avg Compensation

June 2026 Investment Banking

  • Vice President (14) $434
  • Associates (43) $259
  • 3rd+ Year Analyst (8) $210
  • 2nd Year Analyst (22) $179
  • Intern/Summer Associate (13) $156
  • 1st Year Analyst (75) $151
  • Intern/Summer Analyst (65) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
kanon's picture
kanon
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
dosk17's picture
dosk17
98.9
6
GameTheory's picture
GameTheory
98.9
7
DrApeman's picture
DrApeman
98.9
8
CompBanker's picture
CompBanker
98.9
9
Betsy Massar's picture
Betsy Massar
98.9
10
numi's picture
numi
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”