Los Angeles-based Dekel Capital this week launched a new commercial real estate credit platform and is aiming to originate $100 million of preferred equity and mezzanine financings over the next 12 months.
The platform will target multifamily owners and investors and will seek deals requiring $2 million to $10 million for the acquisition and refinancing of assets across the US, complementing the firm’s existing products, said Shlomi Ronen, founder and managing partner of the merchant bank. The firm prefers opportunities in the $3 million to $8 million range.
Preferred equity and mezzanine debt providers are helping sponsors to fill the gap between their own equity and senior lender proceeds.
“The dislocation in the capital markets has placed a severe burden on today’s real estate owners, especially those who are exiting construction loans or facing maturing senior debt and are not in a position to sell,” Ronen said. “With lower LTVs, increasing operating costs, and pressures of covenant compliance, lenders are requiring owners to come up with more equity or risk losing financing or worse their asset.”
So far, many of the projects the firm has considered are deals with maturing construction or value-added bridge loans. This signifies the trend that lenders are currently more conservative in the way they are underwriting. While the bulk of the platform will focus on multifamily, the firm will consider deals on other asset classes as well.
“We are seeing borrowers willing to pay equity-like returns for a fairly secure piece of the capital stack, which is generally going up to about 70 percent of value,” Ronen said. “It is very attractive from a lender standpoint to provide that capital.”
The firm is on a deal size that is below what institutional players offer, noted Benjamin Grosberg, a vice-president at Dekel. “[Institutional players] simply can’t carve those smaller allocations out of a billion-dollar fund,” he said.
Expanding product lines
Dekel has been expanding its product line and, earlier this year, launched a correspondent lending program to originate fixed-rate life insurance and commercial mortgage-backed securities loans on behalf of several capital providers, which include a global asset manager and large Canadian bank.
“Through our various strategies we are able to structure the entire capital stack and provide borrowers with financing that can be significantly less than what they were paying on their existing floating rate loans, especially given where indices are right now,” Ronen said.
The summer has so far been slow. “We are literally herding cats, trying to get people to focus and do something, both on the capital side and the sponsor side,” Ronen said. “A lot of people are hoping this will blow over very quickly, which I don’t think will be the case.”
It remains hard for borrowers to adjust to the new reality on project and financing costs as well as the new lender underwriting criteria. “We have definitely seen the markets become more conservative from a lending and investment standpoint,” Ronen said.
Five-year commercial mortgage-backed securities loans and five-year life insurance loans remain popular with investors. “We have been focusing on originating these types of loans for borrowers,” Ronen said.
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