The qualified transferee test is what I can't get comfortable with

A sponsor I've been tracking is syndicating a $3.1M mezz piece behind a $9.8M senior on a grocery anchored strip in a secondary market. Minimum is $250k and I'd be taking one unit. 11.5% current, 24 month term with one 12 month extension, exit fee 1%.

I got the intercreditor. The qualified transferee definition requires any replacement borrower after a mezz foreclosure to have $150M of net worth and $25M of liquidity, or be approved by the senior in its sole discretion. The mezz syndicate is a group of people writing $250k checks. None of us clears that bar, and nothing in the PPM suggests the vehicle holding the loan does either.

That makes the foreclosure remedy look decorative to me. If this defaults, our practical option is to cure and hope, or negotiate a discounted payoff with the senior from a position where they know we can't take the keys.

What I don't know is whether that's actually unusual or whether every small mezz syndication has this problem and it just never gets tested because most of them pay off. I've asked the sponsor and got a reply about how they'd bring in a capital partner to satisfy the transferee test, which is a plan and not a commitment.

Six months of looking and this is the first thing I've been close to writing a check on, which I'm aware is exactly the condition in which people talk themselves into things.

3 replies

2carlos_nunezActive

That transferee bar isn't unusual for a senior of that size and the syndicate problem is real. What I'd push on is whether the loan documents let the mezz vehicle designate a transferee in advance and get the senior to pre-approve them. Some intercreditors allow a named affiliate or a pre-cleared institution. If the sponsor's answer is "we'd bring in a partner," ask which partner, and whether that partner has seen the intercreditor. A capital partner who shows up after a default prices your position accordingly, which is to say cheaply.

Also the 24 month term on a grocery anchored strip with a 12 month extension means somebody's expecting a refinance or sale in year two or three. What's the anchor lease term? If the anchor rolls inside your extension window, your exit is somebody else's leasing risk.

1laurenkim53Passive

Secondary market grocery anchored, I look at a lot of those at smaller price points. The thing that decides those deals is whether the anchor is actually the traffic driver or whether it's a dying banner keeping the lights on at a below market rent. Ask for the anchor's sales per square foot if the lease requires reporting. If they won't report, that's information too.

2nataliehsuSO1BPRO7

The line about six months of looking and this being the first check is the honest part of the post and I'd sit with it another week.

The qualified transferee test is what I can't get comfortable with

3 replies