Bridge debt on 184 units, with a rate cap that dies in month 24

The flat exit cap is the number I'd fight about. You're buying at 5.1 in a market where 1986 vintage traded at 4.6 three years ago and nobody knows where it trades in 2030. Run it at 5.6 and 6.0 yourself. If 5.6 takes the multiple under 1.5x and 6.0 takes it near return of capital, then what you're actually buying is a bet on the sale environment, with the renovation as a hedge.

Also check the basis. $25.5m all in on 184 units is about $139k a unit. What does replacement cost look like there and what have comparable vintage buildings actually closed at? Basis is the only protection you have when the assumptions go sideways, and it's the one line nobody stresses because it's already fixed on day one.

Two things in the fee stack I'd ask about before the debt.

2% acquisition on purchase price is $468k, and it's paid out of your equity at closing. That's 6.8% of the raise gone before a single unit turns. Some sponsors charge on equity instead, which would be $138k. Neither is wrong, they just mean different things about who is taking risk first.

Asset management on collected revenue rather than on invested equity means the fee goes up as they raise rents, which I don't mind, but confirm whether it's payable when distributions are suspended. Most operating agreements let it accrue and get paid before LPs see anything again. That's the clause that stings in a bad year.

On the pref, cumulative non-compounding means an unpaid year sits there as a fixed dollar claim with no interest on the arrears. Better than non-cumulative, worse than compounding. Ask where it sits in the waterfall relative to return of capital at sale, because that ordering decides whether a mediocre exit pays you or pays the promote.

I'd spend the days before the 19th on the sponsor rather than the model.

Ask for every deal they've taken full cycle, with the projected and realized numbers side by side, and specifically ask about anything they bought in 2021 and 2022 with floating debt. Everyone has a good track record if you only count the deals that closed before rates moved. Then ask for LP contacts from the deal that went worst, not the one they're proud of, and call those people and ask what communication looked like in the bad quarters.

I've been slow on this stuff for two years and the only thing I've concluded is that I can't underwrite an exit cap five years out and neither can they. What I can do is find out whether a person tells me bad news early. That's a real thing you can verify.

The refinance is doing most of the work in that projection. A three-year bridge with a cap purchased through month 24 leaves six months where debt service floats unhedged while the loan still has to be repaid or extended, and the extension options almost certainly carry conditions. Fees and coverage tests are common. Those conditions live in the loan documents, not the PPM summary, so ask for the term sheet and the cap confirmation in writing and read what triggers the extension.

Then ask for the modeled refinance rate and the debt service coverage the property has to hit to support that loan amount. Work backward from it: what in-place NOI does the property need at closing of the refinance, and how far above today's trailing three months is that? If the answer requires the full renovation premium to be achieved on schedule, you're underwriting execution and rates at the same time.

On the flat exit cap, that gives you no cushion for the sale environment. You can test it without their model. Widen it 50 and 100 basis points and see what happens to the multiple.

Comparing 15.6% projected against 12% projected is comparing two numbers that were produced by assumptions, so the spread tells you less than the difference in structure does. Fixed-rate debt at close removes one variable you cannot influence after you wire.

The reason sponsor selection dominates LP outcomes is exactly the situation you describe. Once your money is in, the refinance decision, the capital call decision, and the timing of the sale all get made without you, and your capital stays locked until they act.

@orchard I think the fee argument is a distraction here. $468k on a $6.9m raise costs you maybe 150 basis points of IRR over five years. A refinance that doesn't happen costs you the whole equity. Thicket, rank the risks by what they can do to the principal, not by what annoys you when you read it.

Still building my own list and I have passed on two of these for the same reason you're hesitating.

New here, so a basic one: if the refinance in month 30 can't happen, what actually occurs? Does the lender just take the building, or do the LPs get asked for more money first? Reading this thread I can't tell which end of that I'd be on.