Mezzanine Financing
For Developers Mezzanine Financing is More Popular than Ever!
Due to market conditions construction lenders have become more conservative with underwriting and less generous with funds. This is a great opportunity to add value to your clients’ real estate development financing transactions (especially for subdivisions and income properties).
Over the last ten years we have seen a growing use of mezzanine debt and third party institutional and non-institutional equity investment in real estate transactions. So what’s the big difference? Equity investors may require some minimum yield on the invested capital plus a participation in the ownership of the real estate (cash flow and profits). Mezzanine debt on the other hand is usually structured to require a specific yield or return to the mezzanine lender with most of and usually all of the profits reserved for the developer.
Many describe this as the “capital stack” with the base bank loan being the largest portion (75%), then the mezzanine portion (say 10 to 15%), and the top portion equity (the balance). In all cases the yields and returns are determined by the participants based upon perceived risk.
There are also variations types and styles (even hybrids). But mezzanine real estate investing is a simple concept: an investment in debt, equity, or hybrid debt/equity position subordinate to the first mortgage and senior to the property owner’s equity. Accordingly, mezzanine lenders are less secure than the first mortgage holders but more secure than the property owners. Mezzanine capital is generally secured by an assignment of the membership interests in the borrowing entity (often the LLC); it can also require a second mortgage.
Quality underwriting is critical to mezzanine real estate investing. The process will not make a weak deal or borrower strong, but will create greater leverage and offer the builder/developer the ability to work on more projects. The transaction needs to be underwritten like equity with a strong focus on timing and exit strategies.
Bridge Capital can tailor a mezzanine loan that fits your project needs. For many builders mezzanine financing has become a great solution to a recurring problem. Mezzanine financing can provide the additional dollars and higher leverage that today’s borrowers need to meet their financial goals.