Mezzanine Financing for Commercial Real Estate

What Is Mezzanine Financing?
Mezzanine financing is a hybrid of debt and equity financing that gives a lender the right to convert debt to an equity interest in a company in case of default, generally after venture capital companies and other senior lenders are paid. In terms of risk, it exists between senior debt and equity.

How Mezzanine Financing Works
Mezzanine financing bridges the gap between debt and equity financing and is one of the highest-risk forms of debt. It is senior to pure equity but subordinate to pure debt.

Considerations for Mezzanine Debt
Though mezzanine debt is a great option for investors looking to increase their leverage, some loan programs and senior lenders don’t allow it. HUD multifamily loans, for example, never permit mezzanine financing. Additionally, agency lenders such as Fannie Mae and Freddie Mac typically restrict mezzanine debt to approved sources — lending under specified guidelines. CMBS lenders do permit mezzanine debt, but typically only at their discretion. In the rare event that a senior lender agrees to permit mezzanine debt, both lenders must sign an inter-creditor agreement that governs the rules between the parties regarding how and when each will get paid.

Mezzanine Debt/Financing Rates?
Mezzanine debt is expensive and ranges from 12% to 20% interest. This is because the mezzanine lender is taking a substantial risk by not being secured by the real estate

Mezzanine Financing and Preferred Equity
Minimum Loan: $2 million and up
Term: Coterminous with the first lien
Leverage: Up to 90% LTV on stabilized property
Leverage: Up to 85% LTC on ground-up construction