As published in Scotsman Guide's Commercial Edition, March 2010.
Many property-owners and developers seeking financing for their projects are finding themselves turned down for conventional loans. One alternative financing type that may be available to property-owners and developers in today's market is mezzanine financing.
If your clients have a reasonable amount of equity in their project, mezzanine financing often can provide an excellent way for them to execute their business plan and control the project's outcome.
Generally, it is a type of subordinate debt financing that fills the gap between the senior loan and the equity in a venture or project. It typically takes the form of a second mortgage and provides 50 percent to 90 percent of the total capital requirements, depending on the economy.
In good times, mezzanine investors were willing to do as much as 90 percent of the total, especially in apartments and retail. Today, they typically will finance 80 percent, but only in projects that have existing cash flow.
There are several different types of mezzanine financing, and investors seek varying returns. Intercreditor agreements also vary. Mortgage brokers should understand the nuts and bolts of this financing type to determine whether clients would benefit from a mezzanine loan.
The forms it can take
Mezzanine loans can assume various different structures. Traditional mezzanine financing in a value-added transaction is the most common form. It generally is a loan in which property will have a debt-service-coverage ratio (DSCR) of 1 to 1.1 after it meets requirements of the first mortgage and the mezzanine loan. The loans typically range from 75 percent to 90 percent of the capital structure.
For acquisitions, some lenders offer traditional second-mortgage financing for existing stabilized properties. Conduit lenders generally provide these loans to help borrowers secure the first mortgage. They provide additional leverage for acquisitions.
There also are interim senior loans, which provide as much as 90 percent of the capital requirements via two lenders providing the total required amount.
Another form that a mezzanine loan can take is that of preferred equity. Many lenders that offer long-term, fixed-rate loans often do not want the mezzanine in the form of debt. In these cases, the mezzanine lender becomes an investor and has a preferred return and a liquidation preference prior to the equity investors.
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