Non-Traditional Lending

Mezzanine Financing can be thought of as a hybrid of debt and equity financing, taking junior position behind the senior debt, but senior to the equity. Mezzanine loans are typically paid back on an amortizing schedule, with higher cost of capital than senior debt, but without taking any upside returns above their predetermined interest rate. Mezzanine loans take a leverage position than the senior lender, typically where equity would reside, but with a repayment structure similar to that of a senior debt loan and are guaranteed by the underlying real estate.

Situations Suited to Mezzanine Loans:

• A real estate investor want to purchase a property, but is not able to find a senior debt lender that will lend higher than 65% LTV. The investor only has enough equity to come up with a 25% equity position, and needs to find additional capital to fill the remaining 10%. A mezzanine lender offers to take the remaining 10% at second position in the capital stack, behind the senior lender, in exchange for a fixed-rate, amortizing repayment over the same term as the senior debt.

• An investor is negotiating terms with a senior debt lender to acquire a fully leased industrial building. The investor is seeking a non-recourse loan at 75% LTV, but the lender will not give non-recourse with leverage higher than 60% LTV. The investor’s equity partners will not invest in the deal if there is recourse on the senior loan, so the investor finds a mezzanine lender that will take a second position and fill the gap from 60-75%, allowing the senior debt loan to be non-recourse.