Using Mezzanine Loans For Large Property Acquisitions
It is an unfortunate consequence of the last decade’s major recession that traditional lenders are more on edge about providing large loans for commercial real estate investments. Oftentimes, they will cover your expenses up to a point, but beyond that they won’t take any more risk. If they were your only recourse for funding, then you would have to say “Close, but no cigar” and put your real estate dreams on hold while you either gathered more cash yourself or turned to friends and family members for assistance. However, enough people have faced this problem that a whole new type of lending has sprung up. Non-traditional lenders offering what are known as mezzanine loans are in business to bridge the gap between the funds you need and the funds that the traditional lenders are willing to provide.
Mezzanine lenders are equipped and willing to take on more risk than traditional lenders, and the funding they provide you can either be structured as debt or as preferred equity. They take on a position that is secondary to that of the first lender in your mortgage, which means that their responsibility will be first and foremost to pay off the senior debt holders. Until the top level of the hierarchy of debt is fully paid, the providers of mezzanine loans will not be able to receive returns on their funds. Since they are not the first to get paid, they assume more of the risk and are less likely to be compensated in case you default.
Because mezzanine lending assumes more risk than traditional lending, it does take away some of the flexibility of the person seeking the loan. The loan agreement, also known as the inter-creditor agreement, will stipulate certain terms regarding how the mezzanine financing provider will deal with your assets (particularly the property you are purchasing) in case you default. Often, this involves the mezzanine lender actually taking control of how your property is run. Although this might not sound like your cup of tea, many people investing in real estate actually find quite a bit of value in the services that these lenders provide. They’ve been in the business for a significant amount of time in many cases, and they can bring this expertise to the table if your properties are not turning out to be profitable. Their assistance might make the difference between whether your properties thrive or flounder.
Mezzanine loans will help you collect the full amount of funding required to purchase a property when traditional lenders won’t go all the way. Although you might need to cede some control to the mezzanine lender, the advice they provide can also be quite valuable. Call us today for more info.