Does a 9 percent preferred equity note on a ground up multifamily beat a 10.5 percent debt note on a stabilized retail strip

Question

Take an investor with 20k to place before the end of q3 and these two offerings in front of them. The equity note is on a 48-unit build in boise, 24 month projected hold, preferred return starting 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 the real choice is split or all in on one. The spread is 1.5 points. The equity note does not pay until month 7 and carries construction risk the debt note does not have. The knoxville property has a 2019 appraisal refreshed in 2023 at 2.1m against a 1.05m loan, so the ltv reads fine, though skepticism about retail appraisals is usually earned. The word doing the most work in the boise package is projected, and it appears in enough ppm's to be worth discounting on sight. The knoxville note has cash flow you can look at today. My read is that 1.5 points is thin compensation for construction risk on a ground up in this rate environment. Worth putting to the room, because the anchor in a comparison like this is often the wrong one.

luis_carrera · Answer

Knoxville with all 20k. On a 24 month hold, day one cash flow beats a seven month dead period every time.

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 a ground up multifamily beat a 10.5 percent debt note on a stabilized retail strip

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