I recently spoke with a Principal at a family office and he mentioned that it's not uncommon to refi almost all or at least close to the equity outlay put into a deal on his ground-up MF deals. How common is this? I am not well versed in ground up at all
I wasn't aware that it was common to convert to perm loans with so much of the equity returned back
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In my exp (mostly commercial) developers either sell (merchant build) or refi based on as completed, stabilized value to return equity/distribute to the JV once their project is standing and generating income (sometimes before).
Yea thats the impression I've always been under. But more so what I'm getting to is the amount of equity % received back on refi'ing to a perm loan upon stabilization seems very high from what he told me. Just wanted to know how common it is
It can't happen all the time. The deal would have to perform very well. For example, developer builds a building for $10 million with 65% LTV (its lower since its construction). They put up $3.5 million. In order for them to get their equity back through refi, the property would have to be worth more than $13 million at stabilization in order get their money back at which point they can get a 75% LTV loan to cash out. So essentially value has to increase 30%+ in order for it to happen. Most deals I am seeing now are penciling absolute returns pretty thin and rarely see a 30% total bump on price over construction costs, but maybe its just me and granted construction is super expensive now.
Seems like a very 2011-2016 thing to have happen.
I work at a debt fund and I see deals like this fairly often.
Property is newly constructed and in lease-up still, Sponsor wants to take out their construction lender + mezz/pref and return some equity, permanent debt can't get them there yet, we will come in and do 90 - 100% LTC financing on the deal and bridge it to when its 100% leased/free rent is burned off and they get a permanent takeout. Likely would price in the L + 250 - 300 range (have seen it go tighter lately).
I am seeing these too - at least in the NYC market, these deals are totally overleveraged. We are buying a deal now where the seller got "75%" bridge financing for $100mm - we are buying for $115 and our true senior is at $86mm.
Priced at L +250 -300 is quite a deal for mezz for a borrower. Sounds too good to be true...it's that competitive out there?
That pricing range is for the whole loan - typically the lender would either sell an A-note or do note-on-note financing on up to 80% of the loan (with a cost in the L + 150 - 200 spread range), giving the remaining 20% retained an effective spread of L + 550 - 750 (rough numbers here).
This isn't going to happen on every deal, but I've seen it happen enough to know there is a market of lenders out there willing to do it for the right Sponsor.
It really depends on the waterfall structure, and obviously what your refi is...Let's say you borrow a construction loan at 70% LTC. most will only last 3 years...at which point there is likely not enough value created to get a refi % high enough to take down all the original debt balance PLUS the equity. NOW, the more likely scenario is you have enough to buy out ONE of the equity partners. See below for a back of the envelope scenario. Yes there a caveats, but this is iphone math so bear with me
purchase price: $100,000,000 construction loan: $70,000,000 Equity: $30,000,000 (LP @ 90% = 27M; GP @ 10% = 3M) NOI: $7,000,000...let's say that at year 3 when the loan is due you have a 7% yield on cost...giving you a 7M NOI value refi value: $127,272,727...let's say we cap the NOI at 5.5% refi loan: $89,090,909...get a 70% LTV on a perm refi
leftover refi proceeds after paying loan down: $19,090,909 = 89M-70M...assume the construction loan was all I/O for simplicity...
So you have 19M to distribute...this is where it gets impossible to model without an operating agreement. but at an even split, you wouldnt be able to take out the LP entirely. Take into account the fact that you have a pref rate of say 8%...and a lot of that refi proceeds will be eaten up by the accrued balance. Long story short, if the LP wants to refi and buyout the GP/developer, this can be doable...will you have enough to pay down 100% of the equity for both parties? very rarely...
Banks typically do not like to refi out 100% of the equity because they think it removes your incentive to care about the property.
I have dealt with more than one banker that would make a $10mm loan if the property in question were a brand new acquisition, but they could only get to $8mm in the situation that we would have zero equity left in the deal.
Can attest to this. I am on the cmbs side and we are go to for higher leverage options but 75% on a cash out refinance is still a tough sell for us. Thats a loan that will almost certainly be tweaked and cash out proceeds will be 100% adjusted during UW once we receive feedback from B buyers. Also we learnt during CREFC that appraisals for refinances particularly for retail has to be scrunitized as cap rates are often 100 bps wide compared to acquisitions. So, bottomline, refinances are a tough sell for us particularly when there is a huge cash out. And when you look at the average LTV's for cmbs 2.0 loans, there is a reason why LTV's are no where near the 70's or even high 60's, it because there is more discipline surrounding credit standards this time around.
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