2024 was a year to forget for most of us in the capital markets business. Rates were high, transactions were down, and nobody was buying anything. Most of the business out there was refinance business for sponsors that were out of time. Some faced a situation where they had no option to extend their current financing, so they had to transact. In the beginning of 2024, many in the industry predicted that 2025 would see lower interest rates and a return to normalcy on the transaction side. The industry mantra was “Survive to ’25” which suggested that if we could all find a way to stay afloat through 2024, 2025 would bring brighter days. Unfortunately, 2025 is not off to the rosy start that many had predicted or hoped for, and some are now saying that they hope to “Exist til ‘26.” Interest rates are up from the September 2024 low and the Fed appears to be slowing down their easing cycle. As we saw in today’s Fed decision, they have paused more rate cuts. Inflation is sticking around, and the jobs market does not appear to be cooling. Investors on Wall Street are predicting more inflation via the tariff plan and larger fiscal deficits from tax cuts on the legislative agenda for 2025.
While we hope that the economy stays strong, and interest rates move downward, we still need to be prepared for the scenario in which that does not happen. If you are a sponsor or developer with a maturing loan this year and are short on loan proceeds for a cash neutral refinance you need to be thinking about the best options available to minimize dilution and cost of capital. As we see it, there are three realistic options at your disposal to refinance this year and they are as follows:
1. Refinance with Senior Debt & Mezz Debt/Preferred Equity
2. Refinance into a Stretch Senior Bridge Loan
3. Recapitalize with Senior Debt & Equity
We will discuss what we are seeing in the market right now for Option #1 in this article. Options 2 and 3 will be covered in the following weeks.
Refinancing with senior debt and mezzanine debt can be a cost-effective way to refinance if there is a gap in proceeds. We have been polling our mezzanine sources and here is where things are shaking out:
Last Dollar In: 75% to 80% LTV
Attachment Point: 60% to 65% LTV
Interest Rate: 10% – 12%
Fees: 1% Origination, 1% Exit
Term: 3-5 years
Another factor to consider for a refinance with mezzanine debt is that you are now dealing with two lenders so the lenders must get along and agree to each other’s terms. We have found that the mezzanine lenders usually have a stable of senior debt lenders that they have pre-approved forms with or have closed deals with in the past. In our experience, it is best to start the refinance process with getting mezzanine debt terms first then pursuing the senior lender after understanding what the gap capital financing looks like.
Feel free to reach out to us for a free analysis on your project and get our expert opinion on how we can assist you in 2025.