New York-based RCG Longview recently closed a $602.5 million debt fund, with about half of it likely targeted at multifamily borrowers.
The fund will invest bridge and mezzanine loans at a time when many lenders, especially banks, have grown stingy with such financing. And as senior lenders grow more conservative, offering less leverage than they did just six months ago, mezzanine financing has become a more critical component in the capital stack.
Still, as the need for mezzanine debt grows, so has the pricing. Interest rates are currently in the 14 percent to 17 percent range, up from between 11 percent and 13 percent just six months ago.
RCG Longview will target mostly stabilized assets in primary markets, a shift from the standard acquisition/rehab deals that the company was inundated with in rosier times. Instead, RCG Longview sees opportunity in properties with significant deferred maintenance, where the financing could be used to improve the asset's operating performance, either through lower costs or higher occupancies.
"The standard mod/rehab business model doesn't work as well anymore," says David Valger, a director with RCG Longview. "But there are opportunities for us in properties with deferred maintenance, so that you're not underwriting a bump in rents but a significant improvement in performance."
Cash-in refinancings will also be a focus of the new fund. Many owners with maturing debt will need to recapitalize their properties this year. Senior lenders such as banks, life insurance companies, and the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac are underwriting at tougher terms now. This has constrained proceeds and led to the need for more debt to bridge the gap.
RCG Longview partners with Fannie Mae, providing mezzanine debt on the GSE's CI Mezz-Mod Rehab and DUS Plus programs. The volume of Mezz-Mod rehab deals has slowed considerably over the past six months as lenders favor stabilized assets over transitional deals. But the DUS Plus product, which combines mezz debt with a Fannie Mae permanent loan for conventional properties, has seen more interest lately, particularly for cash-in refinancings, Valger says.
RCG Longview has lent more than $2 billion since 1999, originating between $200 million and $400 million in debt annually across all commercial real estate types. Multifamily has accounted for about half of its business.