Asked for $6M of rescue capital on a 2021 deal, described to us as accretive

$190 premium against $122 actual on the last 40 is the number I'd hammer on before anything about the pref. That's not a small miss, that's their whole reason the money works. Ask which 40 units those were. If they renovated the best exposures first, which everyone does, the remaining 90 trade out worse, not better. And ask what the scope was on the 140 versus what the scope is on the 90, because I've watched sponsors trim the scope without saying so to hold the per-unit cost and then keep the old premium in the model.

I'm still learning this so tell me if I've got it backwards. The pref at 12 percent sits in front of common but behind the bridge lender, right? So if the value never recovers past the loan, the new $6M is also gone, it just gets wiped after the lender and before you. Meaning participating is buying a better seat on a boat that might still sink.

What I don't understand is why a third party would take the same risk at 14 and 2 points if the sponsor thinks 12 is fair.

@vellum that gap between 12 and 14 is roughly the sponsor telling their own LPs they should accept a worse price than the market clears at, which is worth saying out loud.

@canton the thing I'd want in writing is exactly how the participation right is documented. Pro rata to current common percentage, or pro rata to original commitment? Those differ if anyone defaulted on an earlier call. And what happens to the sponsor's promote if the pref is repaid, does the waterfall reset or does the old high water mark survive.

Five months on the cap is the clock that matters and nothing else in your post moves faster than that. The bridge lender almost certainly has a cap purchase covenant with a strike and a term, and if the sponsor can't fund it there's a default whether or not the $6M shows up. So step one is reading the loan agreement on cap replacement and lender consent for subordinate capital, because a lot of bridge docs restrict new preferred at the property level without written consent. Whether they'll consent is a negotiation, and how the pref is papered to satisfy that is a lawyer's job.

The other number I'd pull is what a replacement cap actually quotes at today for that strike and term. Sponsors have been budgeting off stale quotes and getting surprised by a multiple of what they reserved. If the $6M is sized off a stale cap quote, the ask is going to come back a second time.