What is a Mezzanine Loan?

mezzanine loanA mezzanine loan is a form of commercial loan used to finance large commercial properties — typically tall office towers, sizeable hotels, shopping centers, large-scale multifamily properties, and industrial parks.

Mezzanine loans are BIG-TIME loans — typically at least $3 million — generally placed behind even larger first mortgages of at least $8 million.

It’s important to note that few institutional mezzanine lenders will even consider granting a mezzanine loan of less than $3 million, though a handful of expensive hard money lenders may, on occasion, grant a mezzanine loan as small as $1 million.

In the capital structure, the pecking order of priorities would be the first mortgage, followed by the mezzanine loan, followed by the owner’s equity in the property. You would never apply for a mezzanine loan in the first position.

So while for the sake of simplicity, you can think of a mezzanine loan as a form of second mortgage, there are some important differences. Mezzanine loans are different from mortgages in that the debt is secured NOT by a mortgage on the property, but rather by a security agreement against the owner’s stock in the company that owns the property. So if the borrower doesn’t make his or her payments, the mezzanine lender will simply foreclose on the stock of the corporation or the membership interests of the LLC that owns the property.

This brief video from Investopedia helps explain what mezzanine financing is and the risks involved if you default on your loan:

Mezzanine loans on commercial properties are becoming increasingly popular, as mezzanine lenders are recently reporting very low losses and falling loan rates. In fact, rates on mezzanine loans have fallen sharply this year as more mezzanine lenders have entered the market. Last year, a mezzanine loan could easily have cost a borrower 18% and 2 points. Today, most mezzanine lenders are quoting 11% to 12% and 2 points.

The reason interest rates on mezzanine loans are falling is because mezzanine lenders aren’t losing any money.

Spectrum has numerous lenders available who can underwrite a mezzanine loan to help finance your next large-scale commercial loan. Contact us today at 262-456-7613 to get the loan process started for your next commercial property investment.

You can learn more about commercial lending in our article 6 “Insider Tips” for Commercial Real Estate Loans or by subscribing to our blog: Spectrum News.

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