Originally published on April 17, 2024, by Shlomi Ronen for UrbanLand Magazine. 

In the first quarter of the year, we saw a palatable increase in financing requests from a variety of sponsors providing some optimism that real estate activity may be picking up. And while very few could be categorized as “good news” transactions, the vast majority were clearly indicative of what we are seeing in the market.

As we see it, demand for financing can fall into one of four buckets: recapitalization, stressed purchase, ground-up development, or hard-to-place (read office) refinance with each representing its own unique challenges.

Most of the recapitalizations that cross our desk are from sponsors who are near completion on a new development or a value-add project. For a new development project, the borrower typically needs additional funds to complete their project and stabilize the asset in order to sell.

If the developer has time—or is able to get sufficient time on their existing debt—we have been able to successfully fill the gap with either mezzanine debt or preferred equity. The new subordinate capital, which is coterminous with the senior lender and targets returns in the mid-high teens, allows the general partner to avoid having the go back to its investors with the difficult request of funding a capital call.