Mezz Debt Loses Its Luster

The WSJ has an article focused on the demise of Mezzanine debt in today’s market and the losses being incurred by many investors in such debt. Mezzanine debt was often used as part of an investor’s capital stack over the past few years to leverage up acquisitions to amplify their potential returns. Unfortunately, as values have fallen this debt has often been wiped out.

Much of this debt is currently trading at a severe discount to loan values and some investors are acquiring this debt as a way to try to gain a foothold in the property. A recent example of this is Shorenstein acquiring some of the mezzanine debt on McCandless Towers (now Santa Clara Towers) back in July of 2008. I suspect that buy was too soon as that property is barely servicing its debt according to RealPoint. My guess is that property has dropped in value by at least 20-25% since Tishman acquired it for a shade over $500 psf in July of 2007 at a 4.5% Cap Rate. According to an old Business Journal article:

In the McCandless deal, Shorenstein bought a $51.1 million mezzanine loan that is backed by the equity in the two towers.

What equity?

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