Hi guys, would really appreciate any help in simplifying this for me.
I get that a mezzanine loan is secured by the equity interest in the entity that has invested in a real estate property, but what is preferred equity secured by? I am not getting it. Thank you so much!
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There are a few ways you can structure both of these. The way I have often looked at it is mezz financing is as another form of debt and it can often, but not always, require an inter creditor agreement with the senior lender. You can also structure mezz as equity or as a form of convertible debt. Really there is a lot of room for creativity here and this can mean different things to different people.
Pref Equity does not require an inter creditor agreement and usually just enjoys a preferred position compared to the common equity. Usually pref equity generates a fixed return return at a rate that would be lower than JV equity but higher than a lender could/would provide.
Both pref equity and mezz financing usually include some sort of minimum yield maintenance or minimum return multiple language to make sure you don't just pay it off as soon as some cheaper money shows up.
This is a really interesting area of real estate finance that doesn't have a lot of hard and fast rules.
Can anyone with mezz and pref experience dive into some of the structures you’ve come across when lending?
Mixed Use Development - Using Mezz or Pref (Originally Posted: 06/11/2017)
Underwriting a mixed use project in a very strong infill LA market. The existing site is 4 parcels of crappy retail owned by a friend of mine who inherited the property through family. He has spent some time and money conceptualizing plans, drawings, and has been working through an LOI for 100% of the ground floor retail to a major national credit tenant. He doesn't have the balance sheet to build it himself, and doesn't want to have to sign on a construction loan either. Looking at a potential partnership or outright sale to my firm who has the capacity and balance sheet to carry the project forward.
Long story short, I penciled the exit value of the project to be $35MM. Net of land cost, the hard/soft/financing costs are roughly $18MM. I am backing into a land residual of $6MM to underwrite to an appropriate deal level IRR and multiple. The owner threw out $10MM as a number which wouldn't make sense given the metrics.
Trying to determine creative ways of structuring. My firm would prefer to have the owner stay in the deal, pledge his land as equity, and basically structure the balance of the capital through debt/mezz/pre equity so as to minimize their own equity investment in the deal.
I have seen lenders and debt advisory groups pitching non recourse construction debt up to 75% LTC, with an opportunity to layer on additional mezz or pref equity up to 90% total costs. Has anyone priced these deal recently? Is it really realistic to assume non recourse at those leverage levels?
You're probably 13% mezz to 85 or14% for pref equity. I don't think 90 is market. IF (all caps) you like it i would quote 85 max.
Outright sale at $6M with seller upside if you hit certain metrics. It's what we're doing with a buyout of a partner in a hotel project where we are at $6M and they are at $9M for the buyout net value.
Mezz to 85% of cap stack. 14% with an 8% current pay 4% accrual and 1% origination fee.
There are lots of people playing in this space right now.
What balance sheet lenders are doing 75% LTC with mezz on top?
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