CRE Lender

High Yield CRE - Debt risk with equity returns or is it equity risk with no upside?

[CRE Lender @CREDebtFund]

@EllliotttB @jefffeldman I mean it’s a win win if Lender thinks owning the property for 80% to 90% of value is not the end of the world!

[CRE Lender @CREDebtFund]

@realEstateTrent Ha - built one a few years ago. Simple test was to swim in each. The fiberglass one felt like a bath tub. Gunnite felt the best on the feet 😀

[CRE Lender @CREDebtFund]

@SimpleCRE Isn’t industrial redevelopment already proposed here? May need some access improvement.

[CRE Lender @CREDebtFund]

@habspats18 Recently leased up and “stable”

[CRE Lender @CREDebtFund]

KKR is buying at 4% yr 1 yield and here I am saying no to mezz on a core newly built and leased Brooklyn multi with 11% current pay at 1.05x DSCR and 5 yr yield maintenance as I think it’s 90% LTV and I am not getting paid enough! I guess I am the schmuck!

[Yaniv @UntrendedYOC]

Some color into $KKR first earnings call following their $2 billion multi acquisition from the Quarterra portfolio:
👇👇

"We have conservatively priced this deal to an 8% unlevered return with significant upside potential, which we think is a really compelling risk adjusted return. But it's the type of deal that is going to put some pressure on our near-term ROEs for the benefit of longer term profitability."

"As an example, we expect the year 1 yield on this portfolio to be in the low 4% range, obviously less than where we are originating our liabilities today. But the combination of yields increasing over time and the expected appreciation of the asset make this a really interesting deal and one we're excited to pursue for the long-term."

[CRE Lender @CREDebtFund]

@LeylaKuni The 90% CLTV deal is in a lower risk bucket for the one providing the 90%. But ya, agree neither deal is appealing enough but only one person is walking away and that person WON’T get paid.

[CRE Lender @CREDebtFund]

@multifamilyman_ Already happening. There are deals in the CMBS market at 7% DYs for stabilized assets. Also lost a deal where a lender agreed to a standstill for 120 days in case of default! Money got to get deployed!

[CRE Lender @CREDebtFund]

A very different dynamic in the real estate debt world playing out since about a year. Every Multifamily development deal I look at pencils for the debt but on my proforma equity loses money or barely breaks even. Every construction loan take out we quote on a lease up deal, the equity is down 10-25%. Can we really have good debt deals when the equity is losing money? Time will tell.

[CRE Lender @CREDebtFund]

@hitsamty About $160MM of The hold back is for potential litigation expenses. Bond holders will get money back in case the worst case scenario does not play out.

[CRE Lender @CREDebtFund]

The only ones eaten alive were the lenders! French/Korean etc. Natixis led consortium owns the leasehold now and South Korean firm owns the fee. Drama will replay in 2 years and ultimately one group will have to buy out the other! If there is a recession and hotel does not do well then ground owner will buy leasehold. And if hotel continues to do well then lease owner will make a deal for ground. Stay tuned!

[CRE Lender @CREDebtFund]

Here are 5 and 6

[CRE Lender @CREDebtFund]

@SkolCapital raised some good questions on the “why” of real estate lending - especially subordinated lending. Here is an attempt to respond. Always good to think about the basics. Thanks for your questions! On #1 below, I will learn to type “humble” soon! 5 and 6 follow.

[CRE Lender @CREDebtFund]

@SkolCapital If you don’t know what to do with the real estate, agreed, don’t lend. Period. As a mezz lender you need to have liquidity to cure or paydown senior. If you come with some capital and expertise, senior will work with you. Been there done that.

[CRE Lender @CREDebtFund]

@SkolCapital Hmm - none of the projects go exactly on time and on budget. But that’s an argument to be in debt stack & not equity. The risk is first absorbed by equity. I know a deal that performed to proforma but equity is at 50% loss and lender will make levered ~12%. Cap rates moved.

[CRE Lender @CREDebtFund]

@SkolCapital Don’t know non real estate debt market. So can’t comment on this. I assume “private debt” providers are driving up competition in business lending too. Bottom line - once you are an “established player” and are know to “show up” at the closing table then half the battle is won.

[CRE Lender @CREDebtFund]

@SkolCapital Fair argument. Just signed up a deal that takes me 55-74% in the capital stack and gets me a 15% return and approx 1.5x multiple. Is a Multifamily development deal so yes comes with risks. If you can get better - don’t look at real estate (and share those opportunities!)

[CRE Lender @CREDebtFund]

@SkolCapital This can apply to a business too. A lender will similarly not know all intricacies of a particular business that the in place operator knows. But if you don’t have the ability to know “enough” or can’t know enough due to uncertainties then one should not invest.

[CRE Lender @CREDebtFund]

@SkolCapital Hume attempt at a response. What should matter is the after tax return and how it compares with the risk you are taking. There is a place for both debt & equity exposure in a portfolio, not an either or situation. Pref Equity, appropriately structured can get you tax benefits.

[CRE Lender @CREDebtFund]

@thepupil11 @EllliotttB Not sure if disposition yield is same as buyer acquisition cap rates. Especially on older west coast assets, there might be a significant tax increase for next buyer, making the cap rate much lower that the disposition yield.