Lenders warm up to participating preferred equity in choppy financing market

Participating preferred equity emerges as alternative lending structure amid choppy deal-making environment.

Commercial real estate lenders, still stymied by a low transaction environment, got creative to get deals done in the first few months of 2023. Lending structures gaining traction included the introduction of participating preferred equity in commercial real estate capital.

Participating preferred equity is emerging as an alternative structure, as sourcing traditional joint equity has become more difficult amid market volatility, says Cody Kirkpatrick, a managing director and founding member of Berkadia’s JV equity and structured capital.

1-Month LIBOR 4.709%

3-Month LIBOR: 4.984%

1-Month Term SOFR: 4.698%

5-Year Treasury: 4.26%

10-Year Treasury: 3.97%

5-Year SOFR Swap Rate: 3.99%

10-Year SOFR Swap Rate: 3.64%

The hybrid structure has features of preferred equity and joint venture equity. While traditional preferred equity sits lower in the capital stacks and focuses on achieving a target internal income return or equity multiple, with all upside going to the sponsor, participating preferred equity takes a priority return, but also participates in the upside after a catch-up to the sponsors. Preferred equity is therefore seeing an uptick in usage. “Groups that traditionally have been offering JV equity, [at] where the market is today, they’re just more comfortable in a preferred equity position,” says Noam Franklin, managing director at Berkadia JV equity and structured capital. 

Despite a slowdown in transaction volume, several key loans have been completed, with an emphasis on transactions in the multifamily sector. Additionally, there have been several sizeable financings in niche sectors like life sciences. 

Greystone in mid-March provided $257 million in fixed-rate agency financing to Stamford, Connecticut-based real estate firm Building and Land Technology for the acquisition of a multifamily complex in Jersey City. Greystone vice-president Judah Rosenberg originated the Freddie Mac Optigo loan, marking a sizable single-asset financing for Freddie Mac. The 10-year financing was arranged by Cushman & Wakefield.

Meanwhile, Montreal-based CDPQ subsidiary Otéra Capital provided a $310 million construction loan to Longfellow Real Estate Partners for the development of a unique all-electric life sciences asset in California’s Bay Area.

The March 3 deal marked the first all-electric life sciences development in the state and comes amid tailwinds for life sciences investments in and around major metropolitan hubs in the US.

JLL arranged the financing for the development of Avia Labs at Millbrae Station, which will total 315,000 square feet at the Bay Area Rapid Transit and Caltrain station in Millbrae, California.

Commercial mortgage rate spreads March 3, 2023

(1) Assumes interest only (2) SOFR floor of 0-0.25% (3) Assumes no lender fee (4) a dash (-) is range, a slash (/) is 5 year vs. 10 year rates

10-year fixed-rate ranges by asset class

Although we believe the above information to be reliable, we make no guarantee, warranty or representation about it. Any opinions or estimates contained in this update represent the current judgment of Cushman & Wakefield, Inc., and are subject to change without notice. We undertake no responsibility or obligation to revise or update any of our opinions or estimates. Rates and analysis are based on certain assumptions with respect to significant factors that may prove to be incorrect. You should understand the assumptions and evaluate whether they are appropriate for your purposes. 

For more information, please contact Christopher Moyer (chris.moyer@cushwake.com) 

Source: Cushman & Wakefield