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.
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?
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.