The senior's cash sweep nearly ate my coupon before the 1.29x payoff

Twelve months dark is the whole question though. Your reserve was six months and the trigger cured at month 18, so you were running on the guaranty from month 15 to 18 in a slower re-let. What did the guaranty actually look like, and had anyone in the participant group ever tested whether that parent had liquid money as opposed to a balance sheet full of other people's equity?

Reading this from the other end of the market. Nothing I look at in rural counties is big enough for a senior of $18.5m, let alone a mezz slice on top. Do these tranches exist at all under, say, $2m total, or is the legal cost of the pledge and the intercreditor just too heavy for a small deal?

What is a cash sweep, in plain words? I think I follow the rest of this but that part is doing a lot of work and I don't know what it means.

How did the participation reach you? Six months of looking and I've never once been shown a piece of a mezz tranche, so I assume there's a relationship in front of this that isn't in the post.

1.28x over 22 months on paper you never controlled. I'd have taken the same money into raw acreage and waited, and I know that sounds slow next to a monthly coupon. The difference that matters to me is that when your tenant went dark you had no lever at all. You had a reserve someone else funded and a re-letting decision someone else made.

Who administers a participation like this day to day? Somebody is calculating the accrual, cutting the monthly distributions, tracking the sweep test, chasing the borrower for financials. Is that the lead doing it in a spreadsheet or is there an actual servicer getting paid a few basis points?

Does a mezz loan get recorded anywhere? A mortgage shows up on title, but if this is a pledge of the LLC interests I don't understand where the world sees it.

Did the 12% actually land in your account every month, or was it quarterly with a lag? That's most of what I care about in something like this.

@plumb a cash sweep means the senior lender stops letting the borrower touch the property's cash. Rent goes into a lockbox account the lender controls, the lender pays itself and the property expenses in a set order, and whatever is left over gets held instead of released. Vellum's point is that mezz interest sits near the bottom of that order, so once the sweep turns on, the building stops funding the mezz coupon even though the coupon is still owed.

My scale is 8 to 20 units and I still find this useful, because the same trigger logic shows up in agency debt on small multifamily.

Something I've never been clear on: can the senior lender just refuse to let a mezz loan exist? Or is the sponsor free to borrow against their own equity and the senior only finds out later?

@lantern I've been poking at the same thing. On the service side it looks like the lead's counsel drafts the intercreditor and the participation agreement, and then somebody unglamorous does the monthly math forever. That second job is the one I keep wondering about.

Nobody has asked what the sponsor did in month 9. A 19% tenant going dark is a management event before it is a capital event. Did you get property level reporting as a participant, rent roll and trailing twelve, or were you finding out from the lead's monthly note?

12% current plus 2% accrual plus two points out, on top of an $18.5m senior. Blend that and the sponsor is paying real money for the last $4.2m. My deals are 90 day cycles on thin margins and that cost of capital would erase me. I get why it exists on a 2026 maturity refi where the alternative is writing an equity check you don't have. I don't get why anyone uses it on a deal with a normal exit.

What was your plan if the pledge got enforced and the participant group ended up owning the equity? You'd have gone from a coupon to being an owner of four flex buildings with a stressed senior on them, at $125k of ownership that can't influence anything. Did the lead ever put that scenario in writing with numbers?

Re-letting 19% of NOI in six months means somebody funded TI and a broker. If the sweep was on and cash was trapped, where did the fit-out money come from? In my experience that's $30 to $60 a foot on flex space depending on how much office the tenant wants, and it doesn't appear from nowhere.

So for four months the coupon came out of a reserve and a guaranty, meaning out of the sponsor's pocket, not out of the building. That's the whole story right there.

$900 of legal and admin on $125k is under a point, which is lower than I expected. Was that because the lead ate the drafting cost of the intercreditor across $3m of their own position? If the group had been ten people at $125k each I'd guess that number triples.

Would you put $125k into one slice again, or split it across two or three deals? A single dark tenant moved your whole outcome and that seems like a lot of correlation for one check.

I've dealt with this from the borrower's seat. A mezz piece got quoted to me last spring to close a gap on a maturing loan and I walked away because I couldn't stomach the sweep interaction, which is exactly the thing you're describing.

The part I want detail on is sponsor liquidity. You said ask for evidence the guarantor has the money. What did you actually accept as evidence? Bank statements, a net worth certificate, a liquidity covenant with reporting? Because on my side the request I got was a personal financial statement I typed myself, and no one checked it.

@keystone that last line is grim and matches what I've seen on smaller loans. If nobody verifies the guaranty then the guaranty is a sentence, and the reserve is the only real protection in vellum's deal.

Is the supply of these participations going up because of the 2026 maturities? The logic I keep reading is that loans written at much lower rates come due into higher new-loan pricing, the new senior is smaller than the old one, and something has to fill the middle. If that's right the pipeline of gap deals gets bigger, and so does the pile of deals where the gap exists because the asset is worth less than it was.

@vellum still want the TI answer. If the senior held the cash and the sponsor funded fit-out from their own pocket on top of covering your coupon, that's a real number and it tells you how deep their pockets were. If instead the senior released reserve dollars for re-tenanting, then the sweep was softer than the post makes it sound.

Why is a piece of this in the hands of individuals at all? My understanding is that REITs are explicitly allowed to hold mortgage interests, and the rules just don't address mezz loans in the same clear way, so a lot of REITs stay away rather than test it. That ambiguity is a tax question for a professional, but the effect is that the capital comes from funds, debt shops and syndicated groups like the one vellum was in.

Document list I'd want before wiring into a slice like this, and I'd want all of it in final form, not drafts. The senior loan agreement with the cash management and reserve sections, the intercreditor with the standstill and cure mechanics, the pledge agreement and the UCC search results, the mezz note, the participation agreement showing what the lead can do without asking me, the guaranty with the liquidity covenant, the rent roll with lease expirations mapped against the loan term, and the last three years of operating statements.

@halyard on your question, a mezz loan against equity interests generally shows up as a UCC financing statement rather than in the land records, and where and how it gets filed and searched varies by state, so ask counsel in the state of the pledgor's formation.

Details I want. Was the 2% accrual simple or compounding, and was it compounding monthly or annually, because on $4.2m over 22 months the difference is real money for the tranche even if your share of it is small. Second, the two point exit fee, was that calculated on original principal or on outstanding at payoff including accrued? Third, was there prepayment protection or a minimum multiple, because the sponsor refinanced at month 22 on a 24 month term and if there was no yield maintenance you got taken out cheap. Fourth, and this is the one I actually care about, did the intercreditor let the mezz holder cure a senior default and buy the senior loan at par, and did the participation agreement let the lead call capital from participants to fund that? If yes, your $125k was not your maximum exposure.

Trying to understand how the money moves. The lead holds $3m and syndicates $1.2m, so the lead is both an investor and effectively the manager. Do participants pay the lead a fee for that, and does the lead get a promote above some coupon, or is everyone flat pari passu?

Your arithmetic works but the framing flatters it. $35,950 gross on $125k over 22 months is a 1.29x multiple and roughly 15.7% simple annualized, and yes the monthly cash makes the IRR look better than the multiple. Fine.

What's wrong with it is that the price you got paid did not compensate the tail you were carrying. You were four months of vacancy away from a reserve burn, and after the reserve you were relying on a guaranty nobody in this thread has confirmed was verified. Mezz gets priced at 10 to 15 percent because the loss given default is close to total when the pledge is the only collateral. You collected the middle of that band and lost nothing, which is the good outcome, not evidence the pricing was right. Run the same deal ten times with a normal distribution of re-letting speed and tell me what the average looks like.

Taking the real questions together.

@fathom accrual was simple, added at payoff, no compounding, which is why my number is close to 2% flat. Exit fee was on original principal. There was no yield maintenance past month 18, so the sponsor did take us out cheap and I have no complaint that stands up. And yes, the intercreditor had a cure right and a purchase option at par, and the participation agreement let the lead call for pro rata funding to exercise it. I read that clause three times and still signed, which is worth saying plainly. If the senior had defaulted my choice would have been fund or get diluted, and I would not have funded.

@girder the senior released a portion of an existing leasing reserve against approved work, and the sponsor covered about $180k of the fit-out out of pocket. So the sweep was hard on distributions and softer on approved leasing costs. That distinction is in the senior loan agreement, not in anything I was originally sent.

@keystone we got a net worth and liquidity certificate plus two quarters of bank statements at close, and a covenant to report liquidity semiannually. The lead confirmed the statements. I would not have accepted a self-typed PFS.

@ledger fair. I got the middle of the band and the good draw. The reserve is the part I'd insist on again, and I'd want nine months next time, not six.

@trellis monthly lead note with rent roll attached, plus quarterly operating statements. I got the vacancy news in the month 9 note.

@quill I'd split it. One dark tenant moving the whole outcome is exactly the reason.

The purchase option answer is the important one and it's buried at the bottom. A mezz participant with a $125k slice and a pro rata funding obligation into a senior payoff has an unfunded commitment that dwarfs their check. On an $18.5m senior your pro rata piece of a par purchase is roughly $550k at your 3% of the tranche. If the lead calls that and you can't fund, you get diluted or bought out at whatever the participation agreement says, and those provisions are usually harsh. Anyone reading this as a template should price that clause before the coupon.

@tender that reframes it completely for me. I was reading the $125k as the position. It's the entry ticket to an obligation that's four times larger under stress.

@vellum did the lead ever quote a number for what dilution would have looked like if you declined a capital call, or was it just a formula in the document?