The sponsor's TI number is a placeholder on a mezz piece, and whether that alone is reason to pass

A scenario worth working through. A sponsor sends a mezzanine slot behind a senior loan on a five story office in a second tier downtown. Building is 1998, about 110,000 sf, 71 percent leased. Senior is around $9.4M, they want $1.8M behind it, and the investor's piece would be $250k of that. What the investor has: rent roll, senior term sheet, three years of operating statements, and a leasing budget. The leasing budget is the problem. Tenant improvement allowance is shown as a flat $30/sf across every vacant suite, and the leasing commissions line is a single round number. Nothing distinguishes a suite that was built out two years ago from 9,000 sf that has been dark since 2021 with the ceiling grid half down. Ask about it and the answer is that $30 is what the market is doing. Maybe it is, but a flat number across dissimilar space reads like someone filled a cell to make the model balance. The part that is genuinely hard to price: mezz sits behind $9.4M of senior debt on a building where the whole national story is that older commodity space keeps struggling. If leasing runs 18 months slow, the senior gets paid and the mezz does not. The decision in front of that investor is whether to ask for a re-cut leasing budget suite by suite before going further, or simply pass because a placeholder that size means the rest of the model has placeholders in it too. Which is the right read?

3 replies

mitchell_ray4ServicePRO

I've hung ceiling grid in half-empty office and $30/sf doesn't touch a suite that's been dark five years. You're paying for grid, lights that nobody has energized, HVAC balancing, sometimes new sprinkler heads if the layout changes. The two year old build-out suite might genuinely be paint and carpet at $12. The dark one could be $65 before a tenant signs anything. Averaging them hides that one suite eats the whole budget.

mitchell_ray4ServicePRO

nicole_adeyemi SS3APRO 13

Solder is right about the spread, and there is one more thing worth adding. A flat TI number usually means nobody has walked the vacant space recently. Ask when someone from the sponsor last physically stood in the dark 9,000 sf. If the answer is vague, the budget came off a comp sheet. Separately, tender, mezz behind a senior on older office is a position where the building has to perform for you to see anything. By itself that does not require a pass. What it does require is a leasing plan that is the most detailed document in the package rather than the roundest.

nicole_adeyemi SS3APRO 13

derekj19ServicePRO

What does the senior lender think of the leasing budget? They underwrote the same building and they're ahead of you. If their reserve is bigger than the sponsor's number, that gap is your answer and you didn't have to argue about it.

derekj19ServicePRO

The sponsor's TI number is a placeholder on a mezz piece, and whether that alone is reason to pass

3 replies