John oharenko, Building Capital Stacks in Today's Market
“BAD” DEAL• $20 million refinance, full- occupied retail center• 100,000 ft.² , food and drug anchored center• Urban Infill location in major Midwest market CHALLENGES:1. Aggressive Underwriting - maximum loan proceeds with complete cash out of all equity and existing debt.2. Tenancy - Health club, big-box electronics retailers, non-reporting sales psf grocer.3. Sponsorship – Pending legacy issues.
“GOOD” DEAL• $50 million new construction• 200 units luxury, mid- rise podium• Infill location in major Western sunbelt market• Seasoned developer CHALLENGES:1. New construction - completion risk and high costs2. Oversupply - Large supply of foreclosures3. Funding - Very limited construction loan funds
“Good” Deal Capital StackCAPITAL STACK LEVERAGE (YIELD) UNDERWRITINGConstruction Loan 60% (2.75%) Bank funded at 250 bps + Libor with 3-5 yr mini-perm.Mezz Loan 15% (12%) 7% coupon rate with 12% IRR look back coterminous w/Construction. No participation vs. Pref Equity.JV Partner 12.25% (30%) 49/51% Pari Passu on net cash flow w/ 30% IRR, 40/60 thereafter. Project control limited (capital decisions.)Sponsorship 12.75% (30%+) Full control and guarantees and recapture of land profits before any reversionary profits.
CAPITAL STACK OPPORTUNITIES:1. Shop the Stack – Lot’s of money, limited deals2. Rates at the bottom – Moody’s Baa spreads widening. Alternative investments and “floors”3. Wraparound – Capture low rates and worry later