My $150k slice of a bridge loan on a 216 unit paid off last month, two quarters later than the model said

I've been trying to learn the lending side rather than the owning side, and this was my first real position. Writing down how it went while it's fresh.

What it was: a participation. A lender originates a loan and sells pieces of it to other investors, so I owned a slice of the loan rather than a slice of the building. $150k of a $21.4M bridge loan on a 216 unit 1990s asset in a growing secondary market. Bridge means short term floating rate debt, usually while a borrower does work on the property before putting long term debt on it.

The numbers I cared about. Loan was 68 percent of the borrower's total cost, so last dollar of my exposure was about $141k a door. Broker opinion of value was $208k a door and my own back of envelope on in-place rents was more like $190k. That cushion was the whole reason I did it. Borrower was renovating 96 of 216 units. Interest paid to me monthly. Term two years with two six month extension options.

What nearly broke it. The renovation ran behind, roughly a quarter, and the lease-up of the finished units ran behind that. Borrower used one extension option and paid the fee. The bigger problem was that this was floating rate debt with a rate cap, and when the loan extended, the replacement cap cost multiples of the original. Sponsor had to put fresh cash into an interest reserve. One monthly payment landed 19 days late, which was the only time I was genuinely nervous. Payoff came 26 months in, from an agency refinance, and I got principal plus the accrued coupon.

What I'd keep: sizing my last dollar against rents that exist today, not the rents in the business plan. And watching the interest reserve balance every month, because it is the clearest early warning you get.

Rates, fees, and cap pricing all move, so anything specific in here is what my deal happened to carry rather than what's on offer now. Confirm current terms in writing with whoever is originating.

6 replies

1dpatel_reCS4A

$141k last dollar against $190k of in-place value is 74 percent, which is the number I'd have led with. The part your post skips: was your participation pari passu with the lead or subordinate? If it's pari passu you share losses proportionally, if you took a B piece you're absorbing the first hit and the coupon should have been meaningfully higher for it.

And who controlled decisions when the borrower asked for the extension? In most participation agreements the lead servicer decides and you get a notice, sometimes a consent right over a defined list of major actions. If you don't know which you had, go read that document now rather than on the next one. The late payment mattering to you for 19 days is fine. What matters is what you could have done on day 90.

2priya_n21PO1C

Monthly payments and principal back at the end. That's the shape I've been looking for. When the payment came 19 days late, did you get default interest or just wait?

-1devon_pierce Get yoursPRO5

How does someone even see these? Every bridge lender I've looked at is either institutional or not talking to a $150k check.

2omar_haddadActivePRO11

96 units slipping one quarter is a good outcome, honestly. On a 1990s asset the surprise is usually behind the walls, and if they only lost a quarter either the scope was light or the GC was actually good. The version that hurts you is when they open a stack, find galvanized, and the scope doubles halfway through with no contingency left.

1raj_mehta14CapitalPRO6

So how is this different from buying a mortgage note? I thought a note was the loan too. Is the difference that with a note you own the whole thing and here you own a fraction of it?

1chriswalton8CC1CPRO8

What did the lead keep for originating and servicing, and was it off the top or a strip of the coupon? That spread is the thing I'm trying to understand about how these participations get distributed. Also curious whether $150k was their minimum or you negotiated down to it.

My $150k slice of a bridge loan on a 216 unit paid off last month, two quarters later than the model said

6 replies