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Mezzanine Financing Real Estate

Mezzanine loans applied to commercial, industrial, and multifamily real estate are quite different to the standard commercial mortgaging common in this business arena. They are generally secured via a subordinate lien on the property or/and by assuming an interest in the owning entity (i.e. a partnership, trust, corporation, LLC, Delaware Corporation, estate – even a foreign national holding). Mezzanine financing for real estate can sometimes bring special advantages to the borrower by increasing asset returns alongside reducing out-of-pocket expenses.

real estate mezzanine financing

What is mezzanine financing?

There are many ways to describe this common lending tool, but here’s our mezzanine financing real estate definition.

The commercial real estate industry is a vast one that typically relies on two sources of funding for its projects: mezzanine loans and equity. Mezzanine financing typically targets the construction stage of the project, as this is when improvements to or renovations of existing buildings take place. Incentives for this type of financing may include a higher interest rate, as compared with other types of financing. This type of financing typically requires little paperwork, which makes it attractive to business owners who are short on time.

Why use mezzanine financing?

The most common mezzanine financing meaning is definitely an out-of-the-box option on a wide spectrum of leverage options that also includes commercial mortgages, mezzanine construction loans, cash out leveraging, refinancing loan vehicles, CMBS, bridge lending, preferred equity, and real estate private equity. When electing to raise a commercial mezzanine loan, success almost always depends on the unique circumstances of the client and most often aligns closely with one or more of the funding vehicles seen above.

Advantages of mezzanine financing

It’s not enough to just define mezzanine financing— you want to know what it’s good for. Mezzanine financing is a good option for small business owners who are looking to purchase commercial property. There are many different benefits of mezzanine financing which includes quicker access to funds, flexibility, and better rates.

The ultimate goal of mezzanine financing is to provide an alternative source of capital for investors in areas with little to no new investment opportunities.

Another advantage of mezzanine financing is the potential for greater return on investment. Mezzanine loans are riskier than conventional loans but they also offer the opportunity of higher returns.

How does mezzanine financing work?

A mezzanine financing in commercial real estate is when the occupier acquires funds in addition to their traditional lending in order to reduce his or her cost of capital. The occupier makes this decision because the mezzanine company’s anticipated return is higher than the interest rate that would be offered by a traditional lender.

How to structure mezzanine financing?

Mezzanine financing is a type of debt financing that is junior to the primary financing for a company. It is typically used to finance the acquisition of an ownership interest in a company or to provide additional working capital. Mezzanine financing can be in the form of a loan or an equity investment.

There are several factors to consider when structuring mezzanine financing:

  • The credit quality of the company
  • The seniority of the mezzanine debt
  • The interest rate on the mezzanine debt
  • The amount of mezzanine debt relative to the total capitalization of the company
  • The terms of the mezzanine debt

Current mezzanine financing rates

Mezzanine financing rates are currently about 9-11%.

To understand why the interest rate on mezzanine financing is higher than a bank’s lending rate, we must look at its definition:”Mezzanine financing is a second mortgage that provides additional capital and can be an alternative to equity or debt.”

Types of mezzanine financing

Mezzanine loans are a type of financing that provides a balance between the amount of equity and debt in a project. They are usually venture capital or bridge loans, but there are also other types of mezzanine financing. In general, mezzanine financing is considered “higher risk” than traditional commercial bank lending. Mezzanine financing refers to the financial capital provided by a lender in addition to the primary “senior” debt (i.e., first mortgage) for a project or company at the time of its inception or during its growth phase.

What is a mezzanine lender?

Clopton Capital specializes in structuring mezzanine lending for private investors, small/middle market real estate entities, and family offices in the main. We offer real estate mezzanine financing for a range of borrowers, with real estate mezzanine financing options for every need. We help align borrowers with the best mezzanine financing firms for the job, helping with understanding mezzanine financing along the way.

Our many $ billion of closed commercial property deals in the last 10 years qualifies us to consider all applications between $1 million and $ 40 million. Moreover, mezzanine financing for real estate stretches its reach to every city, town, and rural area in the USA. Therefore, Clopton, as a nationwide commercial mortgage broker, is positioned to carry these esoteric loan options to all its clients looking for straight purchase, new construction, renovation, and short-term bridge financing or refinancing, with or without cash outs.
We have built close relationships with an array of distinguished lenders from coast to coast that give us the easily demonstrated capability to offer you direct access to the most competitive commercial property mezzanine funders in the USA for the easiest terms and lowest mezzanine interest rates possible.

what is mezzanine financing in real estate


What is mezzanine financing in real estate?

Mezzanine financing is a type of debt financing. It is usually used by companies to obtain funds for expansion or refinancing. The term mezzanine comes from the word “middle”. Mezzanine financing is typically preferred when traditional mortgages are not available or are too costly because it allows the company to maintain full equity in the project, rather than having to sell it to obtain cash.

What is mezzanine financing in commercial real estate?

Mezzanine financing is an investment in commercial real estate. It is usually done to help develop a property that may have some risks associated with it or to help fund the purchase of a property. The risk level for these loans is higher than other types of investments, but they can also provide higher returns.

How does mezzanine financing work in real estate?

Mezzanine finance agreements are those that offer to bring in a third party as a co-lender. These additional funds come from a non-bank lender. The borrower and the mezzanine investor agree to a contract that specifies the covenants of both parties. This includes terms such as the timeline for repayment, the interest rate, and the security provided by both parties.

Mezzanine financing in real estate terms

There are a few common terms used in mezzanine financing for real estate: junior debt, subordinated debt, and unsecured debt. However, it’s important to understand the difference between each type of debt so you can properly finance your next project.

Junior Debt vs Subordinated Debt vs Unsecured Debt

Junior debt is often used interchangeably with subordinated debt, but the two terms are different. Junior debt refers to loans that have priority over other debts in case of default, such as the first to be repaid if the borrower is unable to repay their loan. Subordinated debt refers to loans that have been agreed upon by all parties, including senior lenders and the borrower, to rank below other debts in case of default and subsequently be repaid at a later date rather than first. Unsecured debt is debt that is not backed by collateral, such as a property.

Mezzanine financing real estate example

Mezzanine financing is a type of bridge loan that can be used to acquire a building before the construction is completed. The type of mezzanine financing commercial real estate developers use can serve a wide range of uses. Unlike all other bridge loans, mezzanine financing commercial real estate does not have a maturity date and it cannot be converted into equity or repaid before the agreed upon date.

We Offer Mezzanine Financing Real Estate Nationwide

Mezzanine Financing Term Sheet
Loan Amounts$1,000,000 up to $50,000,000 +
Max LTV85%
TermsUp to 10 years, coterminus with senior mortgage
AmortizationTypically Interest Only
RecourseTypically Non-recourse
Lending AreaNationwide
Transaction TypesAcquistion, Refinance, Cash out, Bridge, Construction
Property TypesMultifamily, Office, Retail, Industrial, Hotels, Self Storage, Mixed Use, Mobile Home Parks

Our mezzanine financing for real estate guidelines are:

  • Sizes from $1 million to $50 million (total capitalization no limit)
  • Nationwide geography
  • Property must be commercial
  • Typical transaction types are acquisition, recapitalization, value-add, and construction
  • Cost of capital scenario based, market competitive

Case Studies of Mezzanine Financing for Real Estate with Clopton Capital

So you want to know more about how mezzanine financing works? You’re not alone. Lots of people are looking for ways to make their businesses grow, and they need help with cash flow. Mezzanine financing real estate development options are plentiful, but they’re not always structured in such a way to maximize cash flow. That’s where mezzanine financing comes in handy. It lets entrepreneurs borrow money from investors rather than banks or other traditional lenders. And it can be a lifesaver when the economy isn’t doing well because interest rates are so low right now that it would take forever to pay off a bank loan without sacrificing your company. Here are some real-life case studies from Clopton Capital’s history of helping provide mezzanine financing.

LLC Looking to Acquire Apartment Building

An LLC needed mezzanine debt to acquire an apartment building in Washington. They wanted options when it came to mezzanine debt holders, and the investors wanted to use part of the LLC’s existing equity in buildings already owned as collateral for the down payment, therefore avoiding the complex process of refinancing the first liens on the existing properties. There was no way that local banks would lend into this type of strategy – they simply don’t have the flexibility needed, despite the loan to value ratio looking good. Clopton stepped in and structured a $3 million mezzanine loan, secured against the LLC’s existing portfolio and the new building. Happily, for our client, we never had to refinance, therefore neither the existing lender on the portfolio nor the new lender on the acquisition was disturbed in any way. Shortly thereafter, once the new property was under control, the owner was able to refinance the entire capital structure with a new first commercial mortgage, secured by all of the LLC properties linked to an attractive interest rate.

Trust Looking to Buy a Retail Center

A trust looking to acquire a large retail center in Mississippi was looking for maximum leverage, a long-term fixed rate, and 30-year amortization debt financing. We were able to structure two loans: the first was a standard commercial mortgage based on 75% LTV; the second was classified as a small mezzanine financing arrangement that got the borrower additional loan dollars up to 80% loan to value – thus reducing the trust’s equity investment. Both of the loans were delivered to the borrower as one financing package, creating a simple structure with lower costs for its closing and loan servicing going forward.

Mezzanine Financing Real Estate FAQ

What is mezzanine debt financing?

So, what is mezzanine debt in real estate?

It’s basically a type of financing that some companies use as a way to finance their operations. They borrow money from investors and give them equity as collateral. This allows the company to borrow more than they would with traditional financing options and receive funds more quickly.

What is a mezzanine loan in real estate?

Mezzanine loan real estate options are primarily designed to fill the gap between the bank loan, or first mortgage, and the equity that is provided by the small business owner. One of the major advantages of these loans is that they allow businesses to take advantage of their earning power before they have paid off their debt. If this is something you are interested in, please contact us to find out about your options.

What does mezzanine mean in real estate?

A mezzanine loan is a loan that has an interest rate lower than the owner’s mortgage and comes from mezzanine lenders. Generally, mezzanine loans from specialized mezzanine lenders are more flexible in terms of repayment or when the asset is no longer needed. An example would be when you’re purchasing a building with three floors and you need to buy all three floors at once. You might use one line of credit for the down payment, another line of credit for the first floor, and then take out a mezzanine loan for the second floor.

How does mezzanine debt work in real estate?

Mezzanine debt is a loan that a company can take on in addition to the first-mortgage loan it takes out to finance the purchase of commercial real estate. The mezzanine loan is subordinate to the first-mortgage loan, meaning that the mezzanine lender gets paid back only after the first-mortgage lender has been paid. Mezzanine debt is typically used to finance the purchase of high-value assets, such as office buildings or shopping malls.

What is mezzanine finance property development?

Mezzanine finance is a form of debt financing that is used to provide additional capital for a property development. The mezzanine lender will provide the capital in the form of a loan, which is then used to fund the property development. The mezzanine loan will typically have a higher interest rate and shorter repayment period than the primary loan, and it will also be subordinated to the primary loan in terms of priority.

Which is the most common form of mezzanine financing?

Asset-backed mezzanine financing for real estate is a useful mechanism that can help investors in straightforward purchase transactions but reaches further afield into the world of mezzanine construction loans, short-term bridging, and refinancing. Our clients apply this option to real estate in categories like mobile parks, self-storage, retail malls, and offices – to name but a few.

To learn more contact one of Clopton Capital’s commercial mortgage lenders by calling 866-647-1650 or using the Contact Us form available from the menu. You’re always welcome to work with us to find the right mezzanine funding loan rates and repayment plans to suit your every possibility. And with low closing costs attached to a straightforward documentation and underwriting process, your commercial loan process will be stress-free.

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