does a 9 percent preferred equity note on grounds up multifamily beat a 10.5 percent debt note on a stabilized retail strip

Question

i'm sitting on 20k to place before end of q3. the equity note is on a 48-unit build in boise, 24 month projected hold, preferred return starts month 7 per the ppm. the debt note is on a 91 percent occupied strip center in knoxville, first lien, 18 month term, interest only from day one. the boise deal is through arrived, the knoxville note through realty mogul. both minimums are 10k so i could split or go all in on one. the spread is 1.5 points but the equity note doesn't pay until month 7 and carries construction risk the debt note doesn't have. the knoxville property has a 2019 appraisal that got refreshed in 2023 at 2.1m and the loan is 1.05m so the ltv looks fine, though i have the same skepticism i always have about appraisals on retail. what i keep coming back to is that the boise deal is projected, and i've read that word in enough ppm's to be tired of it. the knoxville note at least has cash flow i can look at today. the 1.5 point difference doesn't feel like enough to take construction risk on a ground up in this rate environment, but i'm asking because i might be anchoring on the wrong thing.

luis_carrera · Answer

knoxville, all 20k, day one cash flow beats a 7-month dead period every time on a 24-month hold.

paulgrant17 · Answer

you're not anchoring on the wrong thing but there's a number in that boise ppm that matters more than the 9 percent and i never see people talk about it. who is backing the construction completion guarantee, and is that entity the same as the sponsor. ground up preferred equity on a 24 month projected hold means if the project runs to month 30, your preferred return clock may not reset, it just stops accruing above whatever cap is buried in section 4 or 5 of the waterfall. i got burned reading a similar deal last year where "preferred return commences upon stabilization" and "projected 24 months" were doing a lot of heavy lifting together in the same sentence. the knoxville 50 percent ltv at first lien on a 2023 refreshed appraisal is genuinely conservative by current standards, and 91 percent occupied means someone is already paying rent you can pull from an actual rent roll, not a pro forma boise absorption schedule.

does a 9 percent preferred equity note on grounds up multifamily beat a 10.5 percent debt note on a stabilized retail strip

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