Mezzanine Financing: A Hybrid Solution For CRE Investors
For new commercial real estate investors, there is often a bit on confusion about mezzanine financing. Some CRE investors see mezzanine loans as conventional debt financing. To others, mezzanine loans have more shades of equity financing than anything else. The truth is, mezzanine financing is a hybrid of both debt and equity financing and we will attempt to clear up any confusion.
The Debt Aspects Of Mezzanine Financing
Like traditional loans, mezzanine financing requires a form of collateral. However, that collateral is not property, vehicles, or other items put up by the borrower. Instead, the property being purchased is used as collateral against the amount of financing. There are still terms and rates, but they are much more customizable than with traditional bank loans. It should also be noted that mezzanine financing can be arranged much faster than conventional loans.
Equity In Mezzanine Loans For CRE Investors
Mezzanine loans are not focused on the financial history of the borrower, so much as the potential profitability of the real estate being purchased. After all, if the property is successful and generates revenue, then mezzanine lenders can are repaid much faster. As such, most mezzanine lenders will want to be included in all major business decisions, and help guide the property development to maximize success and profitability. The major caveat with mezzanine financing is that should CRE investors default on the loan, the ownership of the property involved is transferred to the lenders. In order to make payments manageable for CRE investors, some mezzanine lenders will take payments in the form of a percentage of revenue generated each month, rather than adhering to a strict payment schedule. Because lenders usually have strong business backgrounds, if the property is experiencing a rough patch, they can usually help to guide operations so that revenue gets back on track.
How Mezzanine Financing Differs From Regular Bank Loans
As stated above, mezzanine financing can be arranged quickly for time-sensitive CRE opportunities without any red tape, which differs greatly from traditional bank loans. Additionally, mezzanine loans have no balloon payments, and no prepayment penalties – so if CRE investors are in a financial position to completely pay off the loan and eliminate debt from the balance sheets, they can do so without worrying about incurring any extraneous and prohibitive fees.
If you could benefit from mezzanine financing, or if you would like to learn more about our other programs for CRE investors, call Vantage Commercial Capital at 913-543-4242. We work with commercial real estate investors on projects of all sizes to get them the funding they need.