Is anyone actually lending into zone deals or is everyone just investing equity

Question

I want to be on the debt side of one of these eventually, and I cannot work out whether private lending into a QOF is even a normal thing people do or whether the structure makes it awkward. The equity incentive is for the investor, not the lender, so I am trying to figure out what a lender actually gets here besides the collateral. A zone property in a distressed area in, say, parts of Newark or south Memphis is still a distressed area property. The tax wrapper does not change what I am lending against. I have about 180k I want to put to work at somewhere between 9 and 11 percent on a 12 to 24 month bridge, and I keep looking at zone projects because the sponsors seem motivated and the timelines are forced by the clock. But I cannot tell if the improvement obligation actually helps me as a lender, meaning they have to spend the money so the asset gets better, or if it creates a draw schedule that complicates my position. Has anyone here actually done a loan into one of these, either as lender or borrower, and what did the note look like?

sunil_kapadia · Answer

The improvement obligation is real but it does not help your collateral position in the early months. You are still secured against the as-is distressed asset while the sponsor draws down and builds, so month six looks almost identical to month one from your lien perspective.

The question I would need answered first: are you lending to the QOF or to the QOZB underneath it, because foreclosure on one is a very different conversation than foreclosure on the other.

Also, 180k into a Newark or Memphis zone project where all-in costs are usually north of 2M puts you as a small slice of senior or, worse, mezzanine, and mezzanine on a 12 to 24 month bridge with a mandatory improvement clock in a distressed submarket is not a conservative position at 10 percent regardless of how motivated the sponsor is.

Is anyone actually lending into zone deals or is everyone just investing equity

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