Pref Equity: "Current" Pay vs. Coupon
I work in debt brokerage and am currently working on raising financing for a development of 55+ senior housing. I have limited experience with pref equity; however, since the sponsor already has a term sheet for a low-leverage option from a bank, we are going out to market for both higher-leverage whole loans as well as pref slugs to sit behind the proposed bank loan.
I may be overthinking this, but I just received a quote for the pref piece (soft quote over the phone) in which a "current pay" was mentioned in addition to the typical coupon rate- which was significantly higher. Does that simply mean that the equity provider will receive interest of X% (current pay rate) that accrues throughout the construction period on the funded amount?
Typically there is "current" and "accrual" pay. Current pay is like a coupon payment and accrual pay is accrued interest that is paid out on exit.
To add to the above, if there is not enough cash flow to pay the current pay, then it will accrue. Usually to a capital event, refinance or reversion.
OP - do you work in NYC?
yes i do
How did you break in and get the job?
Simple concept - you get quoted an all-in rate as well as a current rate. So if the quote is 10% all-in with 8% current, the 8% has to be paid as you go along while the 2% accrues until it's paid off.
Shouldn't be anything that you don't see daily in the debt brokerage space.
Don't really get the need for a condescending reply. If it were something I've seen daily, I wouldn't be positing the question.
Not to mention that your response is actually invalid. You don't "have to pay the 8% as you go along" in a development deal- there isn't sufficient cash flow to service the debt.
Uhhhh I'll ignore the catty reply and the monkey shit because i want you to understand the product.
If the Pref terms are 8% current pay, that means that you do, in fact, pay them 8% per year on the contributed amount. This is why you generally won't see current pay on development deals unless there is balance sheet exposure, but it isn't totally and completely unheard of.
Couldn't it also be structured as, say, 8% current and 12% on the cumulative unpaid current payments whereas any current payments that can't be paid transfers into the 12% accrual bucket and is paid when cash is available?
Ultimately, just about anything in the debt space can be structured any way you want it to. You'll just see changes (depending on what you're structuring and a whole host of other details) to proceeds, rates, and willingness to execute based on what the perceived impact of said structuring is to the relative risk/reward profile of the deal.
Are there pref lenders that will allow for additional accrual in years where there isn't sufficient cashflow? Or course! Would I call that an 8% current pay with a 12% accrual rate? Especially for the purposes of someone asking "what does current pay mean?" Not really, but hey that's just my $.02.
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