Kicking off the morning concurrent sessions, a panel of Metro DC’s top developers and financiers explored how to structure the real estate capital stack to maximize profits.  The moderator, Roberta Liss, President, Northeast, Northcentral, and Mid-Atlantic, Cushman & Wakefield, orchestrated an exceptionally freewheeling and informative discussion among Bob Murphy, Managing Principal, MRP Realty; Mark Neely, Managing Director, Director of Fixed Income Research, EJF Capital LLC; and Stephen Shaw, Jr., President & CEO, Phillips Realty Capital

Bob Murphy noted that, banks have reduced their exposure on commercial real estate loans from as much as 80% debt coverage in the last cycle to about 65% in this cycle.  All panelists agreed that, in today’s market, preferred equity has numerous advantages over mezzanine debt—Bob Murphy noted that he had not used mezzanine debt on his projects since 2007!

In a similar vein, Steve Shaw observed  that mezzanine debt was relatively common before 2008, but that the Great Recession “shook up” this situation, and that the debt funds moved in to fill the gap, and indeed to control the whole capital stack, and thus indirectly to control the sale of the property.  “There is too much money out there,” he continued, noting that the debt funds have raised more money than they have deployed.  The top 10 lenders control 80% of debt funds, and the next 100 lenders control the remaining 20%.  The funding for the lenders comes from repurchase (“repo”) lines; the better debt funds get better terms on their repo lines than the smaller funds.  Life insurance companies and pension funds are also taking over much of traditional real estate lending.  His remarks included a statement that “we are in the 12^th inning of a 9 inning game.”

Mark Neely described at some length the use of the currently popular Opportunity Zones effectively as a form of capital, and noted that the latest OZ regulations issued on April 18 eliminate many ambiguities in the program and increase certainty, and indicate that the Treasury wants to make the OZ program as accessible as possible.  Bob Murphy asserted that “Opportunity Zones make a good deal better,” but are not enough to make a bad deal good.  While developers generally don’t want to tie up large amounts of capital in a project if they can help it, Bob said that, despite the general 10-year holding period, OZ can be attractive to a developer for the right deal.  However, the uncertainty of the exit strategy in 10 years cuts against the attractiveness of OZ.