REIT rules name mortgages and say nothing about mezz. Does that silence reach the price?

The evidence that would settle it is bid counts, and nobody publishes those. What I've picked up talking to people is that on tranches under about $5m you're often looking at two or three real bidders, and on a $40m mezz piece the list is long. If the REIT ambiguity mattered on its own you'd see the effect across sizes rather than only in the small end, and I don't think you do.

I'd separate two things the deck is mashing together. Who is legally comfortable holding the asset, and who wants the asset at the offered price. Plenty of balance sheets can hold mezz and still won't, because their credit committee doesn't like sitting behind a senior loan they didn't originate. That second group is much larger than the REIT question.

Reading this to learn. Is the practical result of the REIT caution just that mezz mostly gets done by debt funds and insurance money instead? Or does it change what the borrower experiences?

@plumb the borrower experiences a different counterparty, and that is not a small thing over a five year hold. A lender whose money is patient behaves differently in month thirty than one with a fund life ending.

@orchard that's the part I find interesting. If the holder base skews to fund capital with defined lives, then the workout behavior of the whole mezz market has a clock in it that the REIT-held mortgage market doesn't.

Small point on the deck itself. "Structural ambiguity keeps buyers away, therefore free spread" is the shape of most bad pitches I've read. Sometimes it's true. It's also the easiest story to tell when the real reason for the spread is that the deals are hard.

As a borrower who's shopped mezz on two deals in progress, the coupon range I got quoted barely moved between very different lenders. What moved was structure. Cash sweep triggers, how much I had to fund into reserves, whether they wanted approval rights over the capital plan. If a missing buyer class was pushing price around I'd have expected to see it in the coupon and I didn't.

@quarry that's the most useful data point in the thread. Price stable, structure variable. Doesn't that suggest the marginal bidder is present and competing, and the differentiation happens in terms rather than rate?

Structure variance is where the money actually is anyway. On a heavy renovation the difference between a lender who reunderwrites the budget at every draw and one who doesn't is worth more than 100 basis points on the coupon. Ask me how I learned that.

Following along. I mostly want to know if any of this changes what a small passive check into a mezz tranche is worth, or if it's a wholesale question.

@marlow it's mostly wholesale. Your check prices off the tranche the sponsor negotiated, and the bidder count question happened before you were shown anything.

@fathom on evidence, the closest thing I can think of is looking at the same sponsor doing two similar refis with mezz sized similarly and seeing whether the second one cleared tighter when the bid list was longer. I tried to build that comparison from what I could see on four deals and the property quality differences swamped everything. I don't think you can get there from the outside.

Voted that it changes the holder base more than the price. My reasoning is the 10 to 15 percent target range. That range is a function of where subordinate risk clears against senior debt cost and equity return expectations. If a whole buyer category were structurally absent and demand were as strong as the maturity wall implies, you'd expect the range to sit higher, and it doesn't. What the ambiguity does is decide whose name is on the loan documents.

Trying to keep up. So a REIT can hold a piece of a mortgage without issue, and a mezz loan is secured by a pledge of the ownership interest instead of a mortgage, and the rules never say what that counts as? That's the whole ambiguity?

@juniper that's my understanding of the shape of it, and this is exactly the kind of question where I've learned not to trust my own summary. Any REIT actually deciding this is asking tax counsel, not a forum.

@fathom one thing your deck's argument skips. If the ambiguity is real, the manager holding mezz outside a REIT wrapper isn't collecting free spread, they're collecting the spread plus the cost of being the entity willing to do the structuring work. Sizing the tranche, negotiating the intercreditor, having the cash and the appetite to cure the senior if it goes wrong. That's a labor and capability premium, and calling it a mispricing is how you end up underpaid for it.