Using Mezzanine Loans For Commercial Real Estate

Large amounts of capital are often required for acquiring, developing, or refinancing commercial properties. As traditional mortgages become more difficult to obtain, mezzanine loans have become an attractive solution for financing commercial real estate acquisitions. Traditional mortgages have increased in interest rates, often require collateral and can have a lengthy application process. None of these things are associated with mezzanine financing. This and several other factors account for mezzanine financing’s increasing popularity over the years.

Filling the Lending Gap With Mezzanine Financing

With the increased reluctance on the part of traditional mortgages, commercial real estate investors may not be able to borrow the entire amount needed to finance a property. Equity investors used to fill this gap, but today they may require a large enough share of equity that borrowers may find it difficult to realize a return on their investment. Rather than turning to a high-risk equity investor, many borrowers are turning to mezzanine loans. These loans carry greater risk than a mortgage, but have a greater possibility of return for the borrower than associated with equity investors.

Risks Associated With Mezzanine Financing

Entering into a mezzanine loan agreement for commercial real estate typically happens when the borrower already has mortgage obligations. These obligations take prominence over the repayment of the mezzanine loan, therefore increasing the risk that the mezzanine loan may not be paid on time. Because of this, mezzanine lenders require a greater return than mortgage lenders. The interest rates are determined by a combination of the structure of the capital being provided, the risks associated with the property being financed and the relationship that has been established between the lender and the borrower.

Terms of Mezzanine Lending

While mezzanine loans are typically used in the same way, it is difficult to generalize the terms of a loan. The deal structure will be based on the unique situation of the lender and the borrower. Terms are dependent on trust. The loan can be structured as either debt or equity. This depends in part on how much capital is being borrowed. As part of a mezzanine agreement, lenders may also require varied amounts of control in the lending relationship.

Despite the risks associated with mezzanine financing, many lenders and borrowers are seeing it as a viable and lucrative alternative to traditional financing options. Be sure before taking on mezzanine loans that your priorities are in line with those of the lender, as this long-term financing option requires a good working relationship between both parties.