Commercial Mezzanine Loans

Mezzanine loans are a form of junior loan (typically over $3 million), placed behind a first mortgage of at least $8 million (hard money lenders may consider mezzanine loans of $1 million on up).


Second mortgages are prohibited by CMBS lenders within the language of the properties First Mortgage. Prepayments on 1st mortgage refinancing comes with the infamous prepayment penalty or defeasance fee), therefore, if you want to put your hands on your equity, you will need a mezzanine loan.


A mezzanine loan is a loan secured by the membership interests of a limited liability company (LLC) that owns a commercial property. If the LLC fails to make it's payments, the lender quickly does a UCC foreclosure on the stock (a fast process). If the lender owns the stock, it owns the commercial project as well.


Mezzanine loans are usually allowed by the first mortgage CMBS lender or life company (with a Intercreditor Agreement - an agreement reached between the commercial first mortgage lender and the mezzanine lender that permits a mezzanine loan) because Mezzanine loans typically come from huge investment banks or financially strong investment funds that will typically bring the first mortgage current in the event the borrower defaults.


Because commercial first mortgage lenders do not want their borrowers property heavily encumbered with additional financing, they have a due-on-encumbrance clause, that allows the first mortgage lender to demand its entire loan balance be immediately paid in full (acceleration of the note) if the borrower obtained unauthorized Junior financing or mezzanine loan. Thus, the borrower requires an Intercreditor Agreement or the Senior Lender Can Foreclose and invoke the costly prepayment penalty clause.


The intercreditor agreement will provide notice if the borrower defaults on the first mortgage in any way and allow the mezzanine lender to bring the first mortgage out of default as well as remove the borrower.


The terms of an intercreditor agreement have to be negotiated with the 1st mortgage lender to allow the above action by the mezzanine lender to remove the borrower by means of executing a UCC foreclosure on the stock of the company that owns the real estate.


The first mortgage lender has to agree to stand still (called the standstill agreement) and not exercise its due-on-alienation clause (sale, change of ownership, etc...) while the mezzanine lender completes its UCC foreclosure and takes control of the property.



Many intercreditor agreements will allow the mezzanine lender to buy-out the first mortgage note. The first mortgage lender's buy-out price, and defeasance or yield-maintenance prepayment penalty...all have to be negotiated.



Please note that some CMBS lenders and life companies, specifically prohibit mezzanine loans on loans made in the later half of the 1990's. You will be unable to get an intercreditor agreement allowing additional debt on the property. In cases like this, a Preferred Equity Investment may be possible to obtain.



Preferred Equity
Mezzanine Loans and Preferred Equity investments are used to achieve high leverage on large commercial projects of $15 million on up. Normally, life companies, conduits, and banks, will not exceed 80% loan-to-value when making commercial mortgage loans. Mezzanine loans and preferred equity investments are stacked on top of big construction loans or a big permanent loan to achieve loan-to-cost ratio's as high as 95%, and loan-to-value ratio's as high as 90%.


A preferred equity investment accomplishes almost the exact same thing as a mezzanine loan. The lender makes an investment of equity with a preferred return in the LLC that owns the big commercial project. If the management of the LLC fails to pay the preferred member the promised return, the old management is ousted and the common members of the LLC (the former owners) lose their voting rights, dividends, and right to the distribution of any profit.


Equity Kicker is most commonly termed as Profit Participation (virtually all preferred equity investments require the developer to give up profit participation).


Profit Participation
Is when the lender asks for 10% to 50% of the profit on the project when the property is completed and the units, often condo units, are sold off.


Construction lenders will typically lend up to 75% to 80% of the total cost of a project. If a developer lacks the equity to cover the remaining 20% to 25% of cost, the developer will frequently seek a construction mezzanine loan.



A construction mezzanine loan, or more simply "construction mezz" loan, is a mezzanine loan behind a construction loan. If the developer is prepared to cover 15% of the cost of the project, a construction mezz lender will not usually ask for profit participation.


If the developer needs the construction mezz lender to go higher than 85 to 90% of cost, he can expect to be required to give up an equity kicker (profit participation) of 10% to 25% of the profits. On more risky deals, he may be required to give up to 50% of the profits.


Commercial Financing and Coterminous Loans
A Loan That is Coterminous Matures on the Same Date as the Senior Loan
Often, the mezzanine lender will require that the mezzanine mature on the same date the first mortgage balloons.


Commercial Financing for Value-Added Deals
Value-Added Means That the Property Will Be Improved By More Than the Loan Amount
Mezzanine lenders and commercial mortgage lenders that make renovation loans on commercial real estate will often use the expression value-added.


A value-added deal is one where the commercial property is improved using the proceeds of the loan. If the project is well-conceived, the value of the commercial property will increase by more than the amount of money spent improving it. In other words, the property may increase in value by $700,000 after an investment in renovations of only $400,000.


Value-added lenders will often base their loan-to-value calculation on the anticipated value of the property after the renovation is done. Suppose a run down property is only worth $10 million today, and the borrower owes $8 million on his first mortgage. A valued-added lender may make a $3 million mezzanine loan on the project (110% LTV!) if the anticipated value of the property is $15 million upon completion and leasing.


Another example of a value-added deal is where the borrower buys a run-down independent hotel, fixes it up, and then flags the hotel (obtains a national hotel franchise like Holiday Inn or Best Western).

We have access to over 200 top USA Mezzanine lenders...below is just a sample

Sample Mezzanine Program
Mezzanine transactions as small as $750,000, a rarity among mezzanine lenders.

Equity/Mezzanine Loan Program

Equity/Mezzanine Loan Program Bridge Loans considered for providing equity financing in conjunction with select commercial projects.  Bridge loans are secured by a second trust deed or mortgage, and are subject to the following provisions:

Security
First mortgage lien on subject property. Additional credit enhancement (recourse, other collateral, letter of credit or other guarantees) to be determined