Real estate debt

What real estate debt is

Real estate lenders make loans secured by a property, repaid from its rent and, at maturity, from a sale or a new loan. Private credit funds focus on transitional (bridge) loans: properties that are being re-leased, renovated or repositioned and don't yet qualify for a cheap long-term loan from a bank, insurer or CMBS lender.

The lender is underwriting a plan, not a finished asset. The property's income today usually doesn't cover the interest; the bet is that it will once the plan is done, and that the finished property will refinance the loan.

Key metrics

Build your own stabilized NOI

1. Start from today's rent roll: occupied space times in-place rent.
2. Add the space you expect to lease to reach a realistic stabilized occupancy (usually a little below the market's), at the broker's market rent, not the sponsor's.
3. Mark leases that expire during the loan to market, but only the share you expect to renew or re-lease.
4. Deduct expenses the landlord can't pass to tenants, including its share on vacant space.
5. Compare your NOI to the sponsor's and the appraiser's, and say why they differ.

Typical risks

• Lease-up risk: space takes longer to lease, needs more free rent or leases at lower rents than planned, especially when new supply is arriving.
• Rollover and tenant concentration: a large tenant whose lease expires during the loan can undo the plan on its own.
• Refinance (exit) risk: at maturity, a permanent lender sizes the new loan on debt yield and LTV; if that's smaller than your loan, someone has to pay the gap.
• Rates and cap rates: floating-rate interest rises, and higher cap rates cut values.
• Cost overruns: tenant improvements and capex cost more than budgeted.

Protections to look for

• Future funding for leasing costs, released only against signed leases.
• Interest or carry reserve, or a carry guarantee from the sponsor while income doesn't cover interest.
• Rate cap at a strike that keeps coverage above 1.0x, required for every extension.
• Extension tests on debt yield or DSCR that line up with what a permanent lender will need.
• Cash management: a cash sweep or trap when performance slips, including on a major tenant's non-renewal notice.
• Recourse: carve-out guarantees, completion guarantees, and how much equity the sponsor keeps in the deal.

Questions an IC will ask

• What's your stabilized NOI, and why is it different from the sponsor's?
• What does a permanent lender lend against this property at maturity, and what's the gap to our loan?
• What happens if the largest tenant leaves?
• What's coverage at the cap strike, and how long does the reserve last?
• What do we recover if we have to take the property back and sell it into a weak market?

Common memo mistakes

• Using EBITDA leverage instead of debt yield and LTV.
• Accepting the sponsor's NOI and the appraisal's cap rate without testing them against the market.
• Checking LTV on the funded amount only and forgetting future funding.
• Stressing interest rates but not value, or value but not the refinance.
• Ignoring lease expiries that fall inside the loan term.