An extension test cost me two years of distributions and 9 points of dilution
This is the question I would have been too embarrassed to ask in 2022, and now I've paid for the answer.
$75k into a seven-facility value-add storage deal, single-asset syndication rather than a fund. Bridge debt, 68% LTC, floating, with a rate cap purchased for the initial 24-month term and two 12-month extension options. The extensions were where I stopped reading. I assumed "option" meant the borrower's option.
It sort of does. What it also meant: to exercise, the deal had to hit a debt yield test, pay an extension fee, and buy a new rate cap at whatever caps cost on the day. Debt yield came in under the hurdle because NOI growth ran about half of underwriting, mostly rate rather than occupancy. Occupancy actually held at 88% across the seven, which everyone kept telling me was the good news. Street rates in three of the markets went backward, and existing customer increases only got tested twice a year because the GP was scared of move-outs.
So the extension needed a paydown. The GP raised rescue capital, preferred equity at 14% with a 1.5x minimum multiple, sitting ahead of everything I own. My pro rata share of the common got diluted about 9%, distributions had been suspended already at month 14, and the new cap cost got charged to the deal, which I'd never once thought about as an expense line.
Two and a half years in and I've received exactly one distribution, from month 8.
Marked at roughly 0.8x. Might be fine eventually. Might be a very long hold.
What I'd do differently: I'd read the extension conditions before the sources and uses, because that's the actual maturity date of my money. And I'd ask what a failed extension looks like in writing, who funds the paydown and on what terms, before wiring anything.