Bay Area construction loan carries a bank-and-preferred stack

The $123.5 million construction loan SummerHill Apartment Communities has lined up for a 251-unit San Carlos project arrives in a shape that has become the Bay Area's new normal. Fifth Third Bank and California Bank & Trust are providing the $96.5 million senior piece, and TruAmerica Multifamily is closing a $27 million preferred equity investment, Commercial Observer first reported.

At roughly 78 percent of the stack — $96.5 million against $123.5 million — SummerHill's senior loan leaves the preferred equity to cover the balance, with banks underwriting to a senior leverage point while a separate investor carries mezzanine-style risk rather than rolling it into the first mortgage. That is a more conservative structure than the construction loans that prefunded the last cycle, and the kind of layering familiar to anyone watching the refinancing wall resolve itself.

For TruAmerica, the deal is a first: the firm's structured finance platform, launched last year under Ash Baraghoush, had not closed a preferred equity investment until now. Baraghoush, who joined after nearly a decade at Pacific Urban Investors, told Commercial Observer the platform is part of the firm's transformation from owner-operator to a residential investment management company that can participate across the capital stack, and that the firm spent a year-plus cultivating new relationships.

The year-plus of relationship building is itself a measure of how far the market still has to rebuild. Construction funding is being sourced relationship by relationship, as lenders and equity partners re-accustom themselves to underwriting ground-up risk after the last cycle's disruptions, and the first deal sets the template for the ones to follow.

TruAmerica could have placed its first preferred equity into a stabilized asset, where the risk is leasing and operating performance. Instead, it took construction risk in a San Francisco suburb with 97 percent multifamily occupancy and double-digit rent growth, a choice that reads as a platform hunting yield rather than taking a defensive first step.

The project sits at 11 El Camino Real, 24 miles south of downtown San Francisco, and the six-story development will hold 251 apartments, 38 of them designated affordable. Baraghoush pointed to the submarket's occupancy and rent growth, and to the broader Bay Area's strength on the back of return-to-office and the AI boom: "The need for affordable workforce housing continues to remain," he said, which is one of the attractions of the opportunity.

The 38 affordable units add a twist to the underwriting, because those apartments will lease at below-market rents and the income statement on that slice of the building runs below the market rate. The senior lender and the preferred equity holder both need to underwrite to that blended rent roll, and the preferred layer gives the stack some room if the affordable component pressures the initial yield.

Occupancy at 97 percent and double-digit rent growth support the underwriting for both the senior lender and the preferred equity holder, but the structure also reflects a broader shift in how construction debt is priced. Rather than pushing senior leverage to the limit, lenders are pairing a first mortgage with preferred equity, which sits behind the bank but ahead of the sponsor. At roughly 22 percent of the stack, the preferred slice gives TruAmerica real exposure to the project's completion and leasing risk — and real influence over how the deal is refinanced or sold.

The senior loan is shared by two banks, a structure that suggests no single lender wanted to carry the full exposure. Co-lending is a standard way to get a large construction credit done without overloading a single balance sheet, but its prevalence in this cycle reflects a market where lenders are still cautious about keeping a heavy share of any one project. Construction finance is now done in pieces, not by one lender writing a nine-figure check.

The mechanics that kept maturing loans from becoming distress sales — preferred equity, mezzanine debt, structured extensions — are the same structured capital that has been dismantling the refinancing wall, as this publication has argued, and they are now showing up at origination. A construction loan that would have been one bank's risk five years ago is now a bank pair and a yield-hungry investor sharing the stack. The investors who provided rescue capital for existing assets are now being asked to fund new construction, and the structures are nearly identical; the difference is that preferred equity in a ground-up project has no operating history, so the risk is priced accordingly, even if the spread is not disclosed.

Sponsors pricing a ground-up project in a coastal market should expect this layer to be permanent. The days of a single bank writing a nine-figure construction mortgage at full leverage are not returning in this cycle, and a sponsor who wants to break ground now has to bring a preferred equity partner or accept a smaller building. That pricing reality will show up in yields and, eventually, in the cost of housing.

How quickly other preferred equity platforms follow will determine how much capital flows into the space. TruAmerica is not the only owner-operator building a structured finance arm, and if the market rewards this first deal, more sponsors will set up similar vehicles — and more banks will ask for them.