Commercial Real Estate Loans > Commercial Mortgage Financing and Mezzanine Loans

Commercial Mortgage Financing and
Mezzanine Loans

Mezzanine loans on commercial properties are becoming increasingly popular. Mezzanine lenders reported zero losses on mezzanine loans. Mezzanine loan rates are falling.

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

Mezzanine loans are large loans, typically at least $3 million. They are generally placed behind large first mortgages of at least $8 million. Few institutional mezzanine lenders will consider mezzanine loans of less than $3 million, although a handful of expensive hard money lenders may consider mezzanine loans as small as $1 million.

For the sake of simplicity, you can think of a mezzanine loan as a form of second mortgage (although there are some important differences). Obviously you can’t have a second mortgage without a first mortgage. You would never apply for a mezzanine loan in first position.

In the capital structure, the pecking order of priorities would be the first mortgage, followed by the mezzanine loan, followed by owner’s equity in the property.

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. If the borrower doesn’t make his payments, the mezzanine lender will simply foreclose on the stock of the corporation or the membership interests of the LLC that owns the property.

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 the borrower 18% and 2 points. Today most lenders are quoting 11% to 12% and 2 points.

The reason interest rates on mezzanine loans are falling is because mezzanine lenders are not losing any money. At a recent conference of mezzanine lenders, every lender reported a foreclosure rate of zero!

You can find scores of mezzanine lenders on C-Loans.com.

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