Real Estate Loans > Commercial Financing Using Mezzanine Loans and Preferred Equity
Commercial Financing Using Mezzanine Loans and Preferred Equity
Loans and Preferred Equity Are Used to Achieve High Leverage
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.
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%.
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.
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.
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.
can find scores of mezzanine loan lenders on C-Loans.com.