Has anyone structured a boarding house acquisition as a preferred equity deal instead of straight debt
I've been looking at this from the capital side for about eight months, mostly reading deal structures that have already closed. The ones that interest me are the 12 to 18 room houses where the operator knows the licensing and management but can't get a conventional lender to touch it because the income looks too lumpy. Preferred equity seems like a fit, fixed coupon, say 9 to 11 percent, operator keeps control, I sit senior to the common but don't take a lien position. The problem I keep running into when I model it is that the operating cash in year one on these houses is too thin to service a preferred coupon without the operator eating into reserves, and the reserves are already thin because licensing and code work ate the contingency budget before the first tenant moved in. So I'm looking at whether a deferred coupon structure with a balloon at exit makes more sense, but then my downside is just unsecured paper on a specialty asset in a jurisdiction where the license might not survive a sale anyway. I haven't closed anything yet. Curious whether anyone on the ownership side has actually taken preferred equity money into a deal like this or whether it's always been a bank note and seller carry stacked.
