So why did Meridian opt for debt fund financing? Simply put, debt fund pricing has become very attractive, Campanella said.

A Gap in the Capital Markets

Debt funds have been moving into gaps in the capital markets created by a tight CMBS market and a bank market that is tightening underwriting.

“Debt funds are taking a more prominent place in financing transactions, Campanella said. “It started becoming more apparent in the second quarter of this year, not just in the DC area but in many top tier markets.”

Debt fund pricing is coming in as commercial banks are becoming more sensitive about leverage, he continued. “Anything that is above 60% leverage, no matter what the quality, is likely to be a better candidate for a debt fund.”

“For more stabilized products in the 65% to 75% range, we are seeing debt fund pricing with a three handle on it,” he said -- meaning Libor plus 300 to 400 basisi points. Such loans used to be priced at Libor plus 450.

More Debt Funds Entering the Market

It is no accident that debt funds are out and about underwriting deals. Many expected that the capital markets would tighten for real estate finance -- certainly the CMBS market was not trending well at all in the early months of 2016 -- and began raising capital for new funds.

Some examples include Paramount Group's Real Estate Fund VIII, which closed with $775 million in commitments, primarily from German institutional investors. Fund VIII is Paramount's second debt fund and is the largest in the history of the New York-based company and its predecessor.

Madison Realty Capital in New York did a final close recently of Madison Realty Capital Debt Fund III LP. It raised a total of $695 million in capital commitments, exceeding its original goal of $600 million.

And who could forget Blackstone Real Estate Partners VIII, which closed in September 2015 with $15.8 billion, the biggest closed-end private real estate fund ever.

WASHINGTON, DC--The reasons are obvious why debt funds are becoming regular providers of financing for CRE transactions. It just so happens that the recent loan secured by The Meridian Group for its acquisition 1735 N Lynn St., is an exception to these reasons.

Last month, the Bethesda, MD-based Meridian Group acquired International Place, a 12-story, 293,539-square foot office building in Rosslyn, Va., for $106.5 million, or $368 per square foot. Cushman & Wakefield's Bill Collins, Paul Collins, Drew Flood and Shaun Weinberg represented Beacon Capital Partners in the sale.

C&W has also secured the financial for the Meridian Group for the deal, arranging a $80.4 million floating-rate loan from a bank and a debt fund.

There was a lot of competition for this loan, Executive Managing Director John Campanella told GlobeSt.com, which is one reason it isn't a good representative deal of the growing number of debt fund financings. The other reason it is the exception is that debt funds are targeting loans and sponsors that fall slightly under the quality of this transaction.

So why did Meridian opt for debt fund financing? Simply put, debt fund pricing has become very attractive, Campanella said.

A Gap in the Capital Markets

Debt funds have been moving into gaps in the capital markets created by a tight CMBS market and a bank market that is tightening underwriting.

“Debt funds are taking a more prominent place in financing transactions, Campanella said. “It started becoming more apparent in the second quarter of this year, not just in the DC area but in many top tier markets.”

Debt fund pricing is coming in as commercial banks are becoming more sensitive about leverage, he continued. “Anything that is above 60% leverage, no matter what the quality, is likely to be a better candidate for a debt fund.”

“For more stabilized products in the 65% to 75% range, we are seeing debt fund pricing with a three handle on it,” he said -- meaning Libor plus 300 to 400 basisi points. Such loans used to be priced at Libor plus 450.

More Debt Funds Entering the Market

It is no accident that debt funds are out and about underwriting deals. Many expected that the capital markets would tighten for real estate finance -- certainly the CMBS market was not trending well at all in the early months of 2016 -- and began raising capital for new funds.

Some examples include Paramount Group's Real Estate Fund VIII, which closed with $775 million in commitments, primarily from German institutional investors. Fund VIII is Paramount's second debt fund and is the largest in the history of the New York-based company and its predecessor.

Madison Realty Capital in New York did a final close recently of Madison Realty Capital Debt Fund III LP. It raised a total of $695 million in capital commitments, exceeding its original goal of $600 million.

And who could forget Blackstone Real Estate Partners VIII, which closed in September 2015 with $15.8 billion, the biggest closed-end private real estate fund ever.