In the commercial real estate world, unitranche loans do not exist. In real estate ‘whole loans’ are pretty much the same as corporate unitranche financings; a single, first-ranking loan which covers both the senior debt and mezzanine tranches in a leveraged credit structure paying a blended return. Whole loans are secured against the real estate through a first-ranking legal mortgage. With senior debt currently limited to circa 60 to 65 percent loan to value ratio (LTV), whole loans typically take leverage up to the 75 to 85 percent LTV ratios seen in mezzanine loans.
Prior to the global financial crisis, senior debt leverage ratios became super-inflated up to or beyond 80 percent LTV. So whole loans, as they are defined today, were commonplace but the banking market categorised them as senior debt. The phrase whole loan emerged from within the commercial mortgage backed securities (CMBS) industry to describe high LTV senior loans, which were split into a securitised “A-note” and a subordinated “B note”.
A NEW APPROACH
As the world stabilised post financial crash, many of the lenders previously highly exposed to real estate lending disappeared. Consequently, only a few banks were still lending into the property market, and a 50 percent LTV became established as the new benchmark for senior debt from 2009 / 2010.
WHOLE LOANS TODAY
Over the last four or five years, whole loans have become a common feature of the commercial property finance market. However, with commercial property values having increased by circa 20 percent since the bottom of the market in mid-2013 and with senior debt in abundant supply at circa 60 percent LTV, whole loans are no longer a one size fits all solution for higher leverage deals. By adopting a more flexible approach, lenders can still offer relevant whole loans, especially where speed of execution or complex property underwriting is required.
ALTERNATIVE WHOLE LOAN STRUCTURES
The two principle options available to real estate debt funds and other lenders are:
THE INVESTOR PERSPECTIVE
Equipping yourself with the option to invest in whole loans provides flexibility, allowing investors to choose between the security of a first charge throughout the term or creating a residual mezzanine-like position.