Mezzanine Loans

Mezzanine Loans


 

Commercial and Apartment Construction Loans

“Mezzanine Loans”

What in ‘Tarnation is a Mezzanine Loan Anyway?

Mezzanine lenders and commercial construction lenders – over 500 of them – await your application for a mezzanine loan, a multifamily or apartment construction loan, a commercial construction loan, a condo or residential subdivision construction loan, or a land development loan. To apply to 100 mezzanine lenders and 500 construction lenders simply click here.

Mezzanine loans are similar to second mortgages, except a mezzanine loan is secured by the stock of the company that owns the property, as opposed to the real estate.

If the company (usually a LLC) fails to make the payments, the mezzanine lender can foreclose on the stock in a matter of a few weeks, as opposed to the 18 months it often takes to foreclose a mortgage in many states.  If you own the company that owns the property, you control the property.

Our own hard money company once had to foreclose a mortgage in New York, and it took almost two years.  Yikes!  In contrast, a mezzanine loan is secured by the stock of a company, which ispersonal property and can be seized much faster.

Mezzanine loans are also fairly big.  It is hard too find a mezzanine lender who will slug through all of the required paperwork for a loan of less than $2 million.  It is occasionally possible to obtain mezzanine loans as small as $1 million.

In addition, mezzanine lenders typically want big projects.  If the property you are trying to finance is not worth close to $10 million, you may have a hard time attracting the interest of any mezzanine lenders.

There are three typical uses for a mezzanine loan.  Suppose the owner of a $10 million shopping center has a $5 million first mortgage from a conduit.   The owner wants to pull out some equity, but he cannot simply refinance the shopping center because the first mortgage has either a lock-out clause or a huge defeasance prepayment penalty.  In this instance, he could probably obtain a $2.5 million mezzanine loan to free up some cash.

Suppose an experienced office building investor wanted to buy a partially-vacant office building in a fine location.  Once again, assume that the purchase price is $10 million (when the office building is still partially-vacant) and that the conduit first mortgage is $5 million.

This may surprise you, but the right mezzanine lender might be willing to lend a whopping $4 million!  But isn’t that 90% loan-to-value?  Yes, but when the vacant space is rented – remember, our buyer is a pro – the property will increase to $12 million in value.  Suddenly the mezzanine lender is back to 75% loan-to-value and his rationale is obvious.  This kind of deal is called a value-addeddeal.

The third and final use of mezzanine loans is for new construction.  Suppose a developer wanted to build a 400 room hotel across the street from Disneyland.  Hotels today are out of favor, and a commercial construction lender might only be willing to make a loan of 60% loan-to-cost.   If the total cost was $20 million, the developer would ordinarily have to come up with 40% of $20 million or $8 million.  That’s a lot of dough.

A $3 million mezzanine loan solves the developer’s problem.  The commercial construction lender would advance $12 million, the mezzanine lender would make a $3 million mezzanine loan, and the developer would “only” have to come up with $5 million.

There are about 150 mezzanine lenders active in the country today, and you can apply to most of them by just clicking here.

Mezzanine lenders and commercial construction lenders – over 500 of them – await your application for a mezzanine loan, a multifamily or apartment construction loan, a commercial construction loan, a condo or residential subdivision construction loan, or a land development loan. To apply to 100 mezzanine lenders and 500 construction lenders simply click here.

George Blackburne, III is a real estate attorney, the founder of Blackburne & Brown Mortgage Company, Inc.

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