Add this confusing term to your real estate lexicon. “Dequity,” a combination of debt and equity, is the newest buzzword in CRE financing conversations. The word refers to financing solutions that have the qualities of both parent terms. Dequity is used to fill the capital stack, between the senior loan and true cash equity. The gap can be filled with preferred equity, mezzanine debt, subordinated debt, A/B loans and more. While none of these terms are new, they represent the spectrum being referred to as dequity.
Dequity holders are at less risk than last-dollar equity, but the returns can be similar, especially in times of high interest rates. From a developer’s perspective, dequity is riskier than traditional debt, but still a viable way to fill the capital stack.
Dequity is gaining buzzword popularity as conventional loan agreements are harder to come by. Commercial real estate debt origination volumes are down by 52 percent year-over-year. Additionally, the capital markets have seen a 32 percent reduction in the number of lenders, compared to the same period from last year. Getting deals across the finish line has been increasingly challenging.
The Fed’s tightening strategy and rate increases have pushed returns for dequity into the high teens, close to the equity returns of yesterday. Creative and expensive capital solutions are the unfortunate reality of economic downturns, especially after periods where interest rates were practically zero. The market consensus is that, while rates will hopefully start to come down, they won’t be getting back to pre-pandemic lows at any point in the foreseeable future. After one more planned rate hike this year, the Fed’s current projection is for the benchmark rate to only be lowered to 5.1 percent by the end of 2024. Borrower costs will not be significantly lowered any time soon – so it’s best to freshen up on your dequity.
- Bull, M., & Severino, R. (2023, September 21). Market Update & Forecast. Spotify. Retrieved September 22, 2023, from www.spotify.com
- Stribling, D. (2023, September) “Dequity: A Debt, Equity And Capital Markets Explanation”. Retrieved September 22, 2023 from www.bisnow.com