The sponsor's TI number is a placeholder on a mezz piece I'd fund

A group I've looked at before sent me 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 my piece would be $250k of that.

What I have: rent roll, senior term sheet, three years of operating statements, and a leasing budget.

What bothers me is the leasing budget. 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 the 9,000 sf that has been dark since 2021 with the ceiling grid half down. When I asked, I got told $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 I actually can't 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 I don't.

Decision in front of me is whether to ask for a re-cut leasing budget suite by suite before I go further, or just pass because a placeholder that size means the rest of the model has placeholders in it too. I don't know which is the right read yet.

3 replies

1mitchell_ray4 Get yoursPRO6

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.

0nicole_adeyemiPassivePRO5

solder's right about the spread, and I'd add the thing that got me once. 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. That's not a reason to pass by itself. It is a reason to want the leasing plan to be the most detailed document in the package rather than the roundest.

1derekj19SB1B

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.

The sponsor's TI number is a placeholder on a mezz piece I'd fund

3 replies