A mezzanine loss that traces back to sizing off a senior quote that never reached credit committee
A useful case to study: an 84 unit deal at a $9.4m purchase price, first senior quote at 65 percent of cost, $6.1m, verbal from the originator. That leaves a $3.3m gap against equity, and a search for roughly $1m of mezzanine debt at 14 percent with 2 points, on a pledge of LLC interests, subject to the mezz lender's diligence and an intercreditor agreement with the senior. The purchase contract gets signed with a hard deposit on the strength of that stack. Then the appraisal comes in below expectation and the senior's credit committee re-underwrites the NOI, marking down other income and using a higher vacancy factor than the broker package showed. New proceeds get sized off a 1.25x coverage test rather than the loan to cost number the originator quoted, and the gap widens by hundreds of thousands. A mezz lender in that position might not walk, but often comes back with more leverage at a higher rate and bigger origination fee, and the combined coverage on both loans can land right around 1.0x on the lender's own NOI, too tight to fund debt service from the property in year one. When a deal like this dies, the deposit is rarely fully recovered, and third party reports and legal on the intercreditor draft add real cost on top. The lesson is specific: never go hard on a deposit against a verbal loan-to-cost quote. Ask the senior lender for coverage-tested proceeds using their own vacancy and expense assumptions before going hard, size any mezzanine piece against that number rather than the friendly one, and model combined coverage across both loans at the top of the file rather than as a downstream output, since a number like 1.02x should be visible from the start, not discovered at the end.
