From the Desk of Professor Eyzenberg 

“History never repeats itself, but it often rhymes.”
                                 – (Probably not) Mark Twain

Many pundits and colleagues have written about the wave of debt maturities coming to crush us. No need to rehash that here. We all know it’s coming. It’s always coming.

The better topic is what can be done about it. Unlike in prior cycles, we’re not facing a liquidity crunch. Market capacity is not a problem. Even if the banks are still licking their wounds, the securitization and private credit markets have stepped up, ready to plug the gap.

The issue is one-third leverage and two-thirds cash flow constraint. Most deals fail to refinance because the DSCR is too low. You can blame the elevated interest rates (which, in my opinion, are here to stay on the long end of the curve) or you can blame cash flow deficits stemming from persistent concessions and flat rent growth.

A re-emerging solution to this is the institutional ground lease. Yes, that which is old is new again. I have spoken and written on this topic plenty of times. I have spent the better part of my teaching career (20 years and counting) proselytizing susceptible youths into the wonders of this instrument. However, this time it’s different. The instrument has evolved to make it more attractive to the holdouts.

Insurance company money has flowed into the space, whether direct or through aggregators. Private money, not worried about GAAP losses, is willing to price and structure multiple buy-back options. The ability to consolidate the asset 10, 20, 40 or 99 years later provides flexibility for managing capital stack term and also removes the stigma of the leasehold that once widened cap rates by 25 to 50 basis points.

Today, with pricing starting as low as 30 basis points over the 30-year Treasury and paired with proper agency senior debt, a multifamily property can be recapitalized at 82%-84% LTV against the consolidated value. This should certainly help with many of those pesky CLO bridge loans or debt fund construction loans written in the early 2020s.

The deals that are truly in trouble are the ones that have structured capital layered in (preferred equity, mezzanine and C-PACE), which exacerbates the issue. For these, I believe the only solution is an equity infusion, which is a topic for another day.

– David Eyzenberg (Adjunct Professor at NYU Schack Institute of Real Estate & University of Miami Herbert Business School)