tion lender requires the equity of the bor-
rower, or the 35%, to go in first, on day
one, before the lender will provide any
funding. We have some lenders that will
do pari passu, meaning the equity goes in
with the lender’s money, making it easier
on the borrower.”
The fact that mezz debt is being pro-
vided at all for construction—never mind
the bells and whistles—is an eyebrow raiser,
Gantz of Manatt, Phelps & Phillips says.
“Prior to this recent cycle I have never
seen mezz debt in construction, and the fact
that I am seeing it provided now leads me to
believe that the pressure on these capital
providers is greater than it ever has been.”
The concern, he continues, is that com-
petitive pressures will overtake caution and
underwriting standards will start to erode.
“That, of course, is the subtext to all
these transactions. It certainly was a major
The risk mitigation processes were in
overdrive when the company embarked
on the ground-up mezz construction loan,
a deal structure that was relatively new
when it closed in the second half of 2012.
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“It is
interesting
that there
are a lot of
places—
New York,
Miami and San Francisco,
for example—that have
strong condo markets
but a real dearth of
construction lenders.”
theme leading up to the crash—lenders
get too aggressive, overleverage the properties and then everyone pays a price if the
economy turns or fundamentals change.”
Garth, for one, is aware of the risks and
takes the proper risk mitigation measures.
For example, the company passed on a
number of new projects in Houston and
Dallas that didn’t offer a particular reason
to jump in. “There are so many projects
going up in those markets now, we are
beginning to fear overbuilding,” Garth
says.
