Private Credit in Commercial Real Estate: Key Terms and Deal Structures
Private credit is integral to commercial real estate (CRE) financing, providing flexible options beyond traditional bank loans. Below is a brief guide to key deal structures and terms used in private credit for CRE.
Common Deal Structures
Senior Debt: Senior debt is a primary loan secured by the property with top repayment priority. Due to its lower risk, it often features lower interest rates and is used for acquisitions, refinances, or construction.
Mezzanine Financing: Mezzanine fills the gap between senior debt and borrower equity, typically with higher interest rates and an option to convert to equity if desired. It ranks below senior debt but above common equity.
Preferred Equity: Preferred equity receives fixed returns before common equity distributions, offering added capital without taking on more debt. It often includes a liquidation preference.
Bridge Loans: Bridge loans are short-term solutions to quickly finance acquisitions or renovations, providing interim funding until long-term financing is secured.
Typical Deal Process
Application & Due Diligence: Borrowers submit property and financial documents, after which lenders assess risks through inspections and analysis.
Term Sheet & Loan Agreement: Upon satisfactory due diligence, a term sheet is drafted. If accepted, a formal loan agreement is signed.
Closing & Funding: After completing legal and administrative steps, funds are disbursed based on the project timeline.
Monitoring & Servicing: Lenders monitor property performance and compliance, ensuring payments align with the loan terms.
Repayment or Refinancing: At term end, the loan is repaid or refinanced. Defaults may lead to foreclosure.
Conclusion
Understanding these structures helps borrowers and investors navigate private credit in CRE, maximising opportunities and optimising returns.
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