What debt structure is commonly used for value-add office properties?

The most common debt structure used for value-add office properties involves a combination of senior debt and mezzanine debt. This structure allows investors to secure a larger amount of financing than they would be able to with either type of debt alone, as it provides both the stability of senior financing and the flexibility of mezzanine financing.

Value-add office properties typically require significant renovations or improvements to increase their value. Senior debt is often utilized for the bulk of the financing because it has priority in repayment and typically comes with lower interest rates. However, the full funding needs for a value-add project may exceed what senior debt can provide, especially if the equity contribution from the investor is limited.

Mezzanine debt fills this gap by providing additional funding secured against the value of the property, but subordinated to the senior debt. This financing option tends to have higher interest rates reflecting the increased risk, but it enables investors to undertake larger, potentially more lucrative projects without needing to significantly increase their equity investment.

Other options, such as subordinated debt alone or convertible debt, are less commonly used for this type of property investment. Subordinated debt lacks the balance that the combination of senior and mezzanine provides, while convertible debt financing is generally not the norm in value-add strategies