The Growing Popularity of Mezzanine Loans
Some investors are often hesitant to belly up the equity need for large commerical real estate projects. Mezzanine loans, which have increased in popularity over the past few years, make that hesitation disappear. Mezzanine loans are a type of secondary financing used to leverage commercial property investments, freeing capital.
The Mortgage Bankers Assciation reports that second mortgages, preferred equity deals and mezzanine loans totaled $22.8 billion in 2005. That’s an unbelieveable 296% annual rise. This sky-rocketing growth of mezzanine debt parallels a real estate investment boom that has driven commercial property prices to record highs.
How it works?
Property buyers will typically put in equity of around 30% of an asset’s value and finance the rest with a senior loan. Over recent years, borrowers have added more and more mezzanine debt causing loan-to-value ratios to climb to around 90% in deals that include mezzanine. As a result, senior lenders have raised their loan-to-value threshold to 80% from 70%. Interest charged on mezz usually range from 11% to 15% on loans above $10 million. The rate depends on factors such as borrower experience, property type and occupancy.
Most mezzanine lenders focus on deals of more than $10 million, but smaller investors can use mezz debt too. It’s often cheaper for property owners to use than equity financing.
Source: Investor’s Business Daily