A closed Caldrion loan, shown under its project code name. The borrower and sponsor are not named. Terms are as of closing; returns are our underwriting targets, not realized results.
Selective mezzanine · $11.5M · 63% combined LTV · 12.5% fixed
At a glance
| Asset | 312-room upper-upscale full-service hotel downtown. Trailing RevPAR of $214 (74% occupancy at a $289 average rate). NOI after the furniture reserve of $10.4M. |
| Senior loan | $78.0M CMBS loan at 4.10% fixed, interest-only, maturing August 2029 |
| Caldrion loan | $11.5M mezzanine loan, secured by a pledge of 100% of the equity in the mortgage borrower’s parent |
| Leverage | 63.0% combined LTV as-is ($142M); 59% after renovation ($152M); 2.4x combined debt service coverage |
| Term | 33 months, maturing one month before the senior loan |
| Pricing | 12.50% fixed (10.50% cash plus 2.00% PIK), roughly equivalent to S+875; 1.50% origination; 18-month minimum interest |
| Timeline | Closed day 52; the intercreditor agreement took longest |
The situation
After a quality review, the brand required a $14.0M property improvement plan: guest rooms last renovated in 2017, plus the lobby, bar and meeting space. Missing the deadlines would let the brand terminate the franchise, which would also be a default under the CMBS loan.
The CMBS loan couldn’t be increased, and refinancing it would have meant giving up a 4.10% fixed rate for money costing 7% or more. The loan documents did allow mezzanine debt if combined LTV stayed at or below 65% and combined coverage at or above 1.40x. The sponsor had $2.0M of new equity plus a $1.5M furniture reserve.
Sources and uses
| Uses | $M | Sources | $M |
|---|---|---|---|
| Renovation program | 14.0 | Caldrion mezzanine loan | 11.5 |
| Mezzanine interest reserve | 0.6 | Existing furniture reserve | 1.5 |
| Fees and closing costs | 0.4 | Sponsor equity | 2.0 |
| Total | 15.0 | Total | 15.0 |
Why we made an exception to our senior-only preference: the control rights
- Intercreditor agreement: we can cure senior loan defaults, and can buy the senior loan at par if it is accelerated or moves to special servicing.
- Fast foreclosure path: we can foreclose on the pledged equity through a UCC sale and control the hotel in roughly 60–90 days, without disturbing the senior loan. Caldrion was pre-approved as a qualified transferee under the intercreditor agreement.
- Approval rights: we approve budgets, renovation contracts, any change of manager or brand, and the restaurant lease.
- Cash control: after senior debt service and reserves, cash flows through an account we control, and is trapped if combined coverage falls below 1.60x.
- Draw order: sponsor equity and the furniture reserve are spent first. We then fund monthly against progress certified by a consultant.
- Guaranties and insurance: the sponsor gave completion and carve-out guaranties, and we hold a title insurance policy covering the pledged equity.
Risks and mitigants
| Risk | Mitigant |
|---|---|
| Second-lien position | Combined LTV at or below 65%; the low senior coupon leaves wide coverage; right to buy the senior loan |
| Hotel cash flow is cyclical | 2.4x combined coverage; cash trap |
| Rooms out of service during work | Renovation phased floor by floor; 4 points of lost occupancy modeled |
| 2029 refinance | The full stack of about $90M (including accrued PIK) sits against roughly $152M of post-renovation value, or 59% |
Exit and returns, as underwritten
In mid-2029 the sponsor refinances both loans together or sells the hotel. Target: about a 13.2% IRR.
Downside
If a recession cuts RevPAR 15%, NOI falls to about $8.3M and the value to about $104M at an 8% cap rate. Combined LTV reaches about 87%, so the mezzanine loan still has roughly 13% of equity beneath it, and we can take control and hold the hotel. This is why we do mezzanine only selectively.
See all our transactions, the twelve loans compared and our criteria.
This case study is provided for information only. It is not an offer of securities or investment advice, and targeted results do not indicate future results.