Quick question relating to debt funds that employ back leverage. Assuming it’s 50% leveraged, 50MM from warehouse line and 50MM from the debt funds own capital.
100MM total loan commitment with a point in and point out. Does the debt fund typically have to share those fees with the warehouse lender? Because if not, it’s effectively 2 points in and 2 out based on their actual capital.
Based on the most helpful WSO content, when a debt fund employs back leverage using a warehouse line, the fees (such as points in and points out) are typically retained by the debt fund and not shared with the warehouse lender. The warehouse lender's compensation generally comes from the interest rate charged on the borrowed amount, not from the origination or exit fees associated with the loans.
In your example, if the debt fund is leveraging 50% of the $100MM loan commitment with $50MM from the warehouse line and $50MM from its own capital, the fund would effectively earn 2 points in and 2 points out on its $50MM equity contribution. This leverage amplifies the fund's returns, as the fees are calculated on the total loan amount ($100MM), but the fund only deploys half of that amount in equity. The warehouse lender's role is to provide the cheaper debt, not to participate in the fee structure.
Sources: https://www.wallstreetoasis.com/forum/real-estate/debt-funds-repo-lines-vs-warehouse-lines-vs-subscription-facilities?customgpt=1, Fund-Level Revolvers, Debt Funds - Levering loans?, What returns have you achieved from co-investing in your fund?, Debt Fund Modeling in REPE?
There are usually facility fees on warehouse lines along with unused fees for committed capital from the warehouse provider that’s not being drawn down. I haven’t seen additional origination fees from warehouse providers on new deals, however I’ve seen several charge extension or modification fees on individual deals when there are changes, but it was usually a small portion of the modification fee we as the debt fund were charging
The back leverage lender will also charge an origination fee. Typically about 1% as well but you can try to negotiate it down which can significantly help your LIRR depending on the back leverage advance rate. I have never seen a back leverage provider waive this fee in my experience.
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