How to Understand Mezzanine Financing
Mezzanine financing allows both real estate investors and lenders to earn a profit based on the way the financing is structured. Mezzanine loans are usually not the only loan placed on a property, and they are normally placed in a secondary position. Borrowers must understand a number of concepts to take full advantage of mezzanine financing.
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Instructions
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Comprehend loan-to-value ratios. The value of a property in the current retail real estate market is what lenders are interested in knowing. The bank or financiers are prepared to offer clients a certain percentage of the loan-to-value. A borrower must know the specific loan-to-value that each potential lender offers. This number can go as high as 90% based on the type of mezzanine financing that the borrower is using.
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Understand a straight debt mezzanine loan. In this type of transaction the highest loan-to-value ratio possible is usually 85%. The defining terms of a loan like this include being in a junior lien position, having no share of any monthly income streams coming from the property, and having no say in how the property is managed.
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The borrower needs to determine the amount of equity and monthly cash profits he is willing to give the lender. If a mezzanine loan borrower is prepared to give up a greater share of the equity and profits from the cash flow on a monthly basis, he will be able to acquire a loan with a higher loan-to-value ratio. The lender considers this a safer investment, so he will offer you greater rewards because his risk is lower. This allows borrowers to be in a more leveraged position, and obtain a loan-to-value as high as 90%. A financing partner can protect himself further by setting up an exit fee which he receives once the project is sold.
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Comprehend your particular situation fully. Before you approach any lender to acquire mezzanine financing, make sure you know your own property needs completely. It is crucial that you know how to explain the specific parts of your real estate transaction to the lender in a way that she will understand. You are trying to convince the one who will finance the loan that you are a good project in which to invest.
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References
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