Mezzanine Loans and Preferred Equity Are Used to Achieve High Leverage
Mezzanine loans and preferred equity investments only come into play on very large commercial projects. Lenders will seldom make mezzanine loans and preferred equity investments on commercial projects worth less than $15 million.
Mezzanine loans and preferred equity investments are used to achieve very high leverage on large commercial projects. Normally conduits, banks, and life companies will not exceed 80% loan-to-value when making commercial mortgage loans. Mezzanine loans and preferred equity investments are stacked on top of big construction loans or a big permanent loans to achieve loan-to-cost ratio’s as high as 95% and loan-to-value ratio’s as high as 90%.
A mezzanine loan is a loan secured by the membership interests of a limited liability company (LLC) that owns a commercial property. If the LLC fails to make it’s payments, the lender quickly does a UCC foreclosure (a fast process) on the stock. If the lender owns the stock, it owns the commercial project as well.
A preferred equity investment sounds quite different than a mezzanine loan, but it accomplishes almost the exact same thing. The lender makes an investment of equity with a preferred return in the LLC that owns the big commercial project. If the managment of the LLC fails to pay the preferred member the promised return, the old managment is ousted and the common members of the LLC (the former owners) lose their voting rights, dividends, and right to the distribution of any profit.
Why would a lender make a preferred equity investment rather than a normal mezzanine loan? Some permanent loan documents prohibit mezzanine loans, so the lenders are forced to make a preferred equity investment.
LoanLynx can assist you in obtaining preferred equity for large commercial transaction in excess of $15 million.