REIT rules name mortgages and stay silent on mezzanine, does that silence actually reach the price

The evidence that would settle it is bid counts, and nobody publishes those. The general experience in the market is that tranches under about $5m often draw two or three real bidders, while a $40m mezz piece draws a long list. If the REIT ambiguity mattered on its own, the effect would show up across sizes rather than only at the small end, and it does not appear to.

It helps to 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 will not, because their credit committee does not like sitting behind a senior loan they did not 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?

@nataliehsu 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.

@karen_whitfield 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.

A small point on the deck itself. "Structural ambiguity keeps buyers away, therefore free spread" is the shape of a great many bad pitches. Sometimes it is true. It is also the easiest story to tell when the real reason for the spread is that the deals are hard.

Look at it from the borrower's side. When a sponsor shops a mezz piece across very different lenders, the coupon range quoted tends to barely move. What moves is structure. Cash sweep triggers, how much has to be funded into reserves, whether the lender wants approval rights over the capital plan. If a missing buyer class were pushing price around, you would expect to see it in the coupon, and that is where it consistently fails to show up.

@carlos_nunez that is the most useful data point in the thread. Price stable, structure variable. Doesn't that suggest the marginal bidder is present and competing, and that the differentiation is happening 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. The practical question underneath this is whether any of it changes what a small passive check into a mezz tranche is worth, or whether it stays a wholesale question.

It is mostly wholesale, @priya_n21. Your check prices off the tranche the sponsor negotiated, and the bidder count question was settled before you were shown anything. On evidence, @wendy_park48, the closest thing would be the same sponsor doing two similar refis with mezz sized similarly, and checking whether the second one cleared tighter when the bid list was longer. Anyone who tries to build that comparison from a handful of deals finds that the property quality differences swamp everything. It is very hard to get there from the outside.

Voted that it changes the holder base more than the price. The 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 would expect the range to sit higher, and it does not. 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?

@kevin_lombard that is the shape of it as I understand it, and this is exactly the kind of question where a summary should be trusted least, this one included. Any REIT actually deciding the point is asking tax counsel rather than a forum.

@wendy_park48 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.