Pref equity behind an agency loan at 78 percent last dollar, on a basis that reset nine months ago. Whose value is the cushion actually measuring
Take a preferred equity offering on a 300-unit 2019-vintage asset where the real question is whose value the position is protected against. Structure as presented: a fixed-rate agency loan senior at 58 percent of the sponsor's purchase price, assumable, four years of term left. Pref sits behind it, taking the stack to 78 percent of that same purchase price, at 12 percent, 4 percent current pay and 8 percent accruing and compounding, with a two year minimum multiple of 1.20. Rights on payment default include a change of control at the LLC level and manager removal, which reads as workable given the senior loan is assumable and does not appear to trigger on a sponsor-level swap, though that reading deserves lender's counsel confirmation before anyone relies on it. The sticking point is that the sponsor bought this asset nine months ago at a price described as 26 percent below the 2022 peak, so the 78 percent last-dollar figure is measured against a basis that already reset once. The cushion looks reasonable on that basis, but the pref is being raised now to fund a capital plan and true up a common equity shortfall, which suggests the original equity check did not fully land and raises a fair question about whether the purchase price was a genuine clearing price or a number set in a bilateral negotiation nobody else bid on. The appraisal in the file is nine months old, from the original acquisition, so the 78 percent figure is really 78 percent of a print the pref is now papering over. The decision worth weighing is whether to require a new as-is appraisal as a condition, which slows the process and can cost the allocation, or to price the added uncertainty into the coupon and the minimum multiple. Replacement cost on an asset like this often runs well above basis, which is the comfort most people point to, but replacement cost has never paid anyone's accrual on its own.
