Mid Atlantic Real Estate Journal — Fall Preview — September 27 - October 10, 2013 — 11A F inancing
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By Ed Brown, NorthMarq High leverage dequity emerges as another capital option
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80% for other property types. Recent fixed rate quotes for a 10 year, 85% loan to value, multifamily funding range from 5.75% to 5.90%, 30 yr. amortiza- tion with 1 to 2 years interest only. These Lenders typically securitize the senior debt and hold the subordinate piece on their balance sheet. Regardless of the desired source or structure, all of these transactions require signifi- cant levels of due diligence regarding the capabilities and historic track record of the capital source. An understand- continued on page 14A
hen I set out to write this article about the availability of fund-
ating decisions for the property. Dequity functions as straight debt, albeit with comprehensive covenants and remedies. It is subordinate in preference to the senior debt but superior to any distributions to any equity partner. The established pay rate(s) are commensurate with the underwritten risk as mea- sured by total leverage level, property type and location (as usual strong multifamily con- tinues to attract the best rate structure), total debt yield and debt service coverage. There are also some sources that are will- ing to employ these structures
for value-add repositioning or new ground up development at higher fixed returns. Examples of Dequity include a group of approved preferred equity lenders who can go behind existing or newly origi- nated agency debt up to 90% of the total capitalization with an immediate pay rate of 9% on the subordinate piece and an addi- tional accrual up to a 12 or 13% total return. The term ranges from 3 to 10 years, co-terminus with the senior debt. These Lenders will often employ cash sweeps or some split mecha- nism during the latter stages
of the term to avoid having the entire accrual due at loan maturity. Agency parameters usually require these Lend- ers to secure their investment through direct participation in the ownership structure as a preferred capital partner (or Member if an LLC). Likewise we have sources that provide a seamless com- bination of senior debt plus subordinate debt with a fixed rate structure that mimics an ordinary commercial mortgage loan but can go as high as 85% leverage for multifamily and select credit anchored retail and
ing options at the higher end o f t he capital stack, I envisioned an organized summary of some of the competitive s t r u c t u r e s
Ed Brown
we have executed regionally and nationally. These include joint venture equity, mezzanine financing, preferred equity and hybrid combinations of senior and subordinate debt. However it quickly became apparent that the framework of this forum is not adequate to comprehensive- ly review all of these capital op- tions and their respective legal and economic structures. Leaving a detailed treatment of JV Equity and it’s myriad of co-investment options and mul- tiple return waterfalls behind for another article and another day, I decided to focus on the increased liquidity available to fund the top end of the capi- tal stack through mezzanine loans and hybrid high leverage combinations of senior and subordinated debt. This fund- ing segment typically occupies a space between from 70% to 80% up to a maximum of 90% of the total capitalization. It reduces the required amount of Sponsor equity and may replace a potential need for third party equity. Traditional JV equity and Preferred Equity are interjected directly into the ownership structure of the Borrower. How- ever Capital Sources providing this debt that acts like equity (sometimes called “Dequity’) may chose to lend against a secured interest on the owner- ship entity with an inter-credi- tor agreement with the senior Lender or directly participate as a Capital Partner in the ownership operating agreement through a preferred equity structure. Regardless of the le- gal structure these fundings ec- onomically resemble debt with both a preferred monthly fixed pay rate and an incremental accrual to a higher total fixed rate or in some cases a simple fixed monthly pay rate. The aforementioned JV Equi- ty transactions often provide a little higher total capitalization but also participate directly in both the profits and major oper-
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