Using Mezzanine Loans for Commercial Real Estate

 

Commercial real estate developers often have to use a combination of different types of financing in order to make big development deals happen. In the current real estate market, banks are reluctant to lend out more than 60 percent of a commercial property’s purchase value. For investors, that means that they must come up with an alternative plan in order to finance the remaining chunk of the purchase price. If a company has deep cash reserves, then this probably won’t be an issue. For most organizations, though, access to liquidity is difficult, so they must find additional investors and sacrifice equity. Another option for developers is to consider mezzanine loans. This type of loan is a product that rests between a mortgage and a piece of equity in your company. You get remaining funding for your investment property, and when you’ve paid off your obligation, you do not need to provide any piece of your company to the lender. This allows for more funding and more company control.

Secure More Funding

The greatest benefit of mezzanine loans is the allowance for companies to secure additional funding for their development projects. Finding the right source of capital for commercial real estate can be tricky these days, so this type of loan can be a great help. Additionally, instead of taking your company’s cash out of your hand for a property purchase, you can hold onto your reserves in order to cover the costs of other operations. A loan from this source usually has a shorter term than a mortgage, around five years instead of 10 or 15. In many situations, a business must only pay interest, and once a property is sold, the loan can be paid off. In investment properties that are fixed up and flipped, this can be a great choice.

More Company Control

Mezzanine loans can also help keep your company at the helm exclusively. Some types of investments require you to divide up pieces of your business and hand it out to the highest bidder. Then, the most important decisions about your company may not be in your hands any more. With this type of loan, you maintain control over your organization. Additionally, you’re not required to pay dividends or returns beyond the loan amount to your lender. The only way you could lose some equity is in the case of a loan default.

Commercial real estate investors who need creative financing choices should look into mezzanine loans. As you explore your options, you may find that this type of loan could work for your unique situation.

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