Multimillion dollar commercial real estate transactions are a prime example of the way in which mezzanine loans can be used to benefit both property owners and real estate investors. But what are those benefits and why are they particularly important in real estate?
Benefits of Mezzanine Financing for Buyers
In commercial real estate, the primary source of financing is often limited to no more than 60% of the value of the property. The potential buyer must obtain additional financing if they are unable or unwilling to put up the rest of the funding to complete the purchase. Mezzanine financing is one way to make up this shortfall and ensure the deal goes through.
Mezzanine loans can also help the owner obtain a greater return on equity in the property, since they are required to invest less of their own money. These loans are unsecured and can be obtained quickly by owners with a record of successful investments.
Benefits of Mezzanine Financing for Investors
This sort of investment is an inherently risky position. But with great risk can come great reward, so investors are often willing to put up mezzanine financing for real estate transactions. Investors can expect high interest rates, well above the prime rate. They can also structure their investment as a hybrid of debt and equity, so that in the event of property owner default, the mezzanine investor will have a share of equity in the property. The repayment period for a mezzanine loan is also far shorter than even a commercial mortgage (which is shorter than a residential mortgage). Therefore the investor can expect to receive those high returns within a relatively brief period of time.
Mezzanine Loans Make Commercial Real Estate Deals Happen
Multi-tiered financing is commonplace in commercial real estate transactions, not only because it has benefits for both buyers and lenders, but because it is often necessary to make a deal feasible for all parties. Even lenders with large amounts of resources at their disposal prefer not to put all of their eggs in one basket. That is one reason why commercial mortgage lenders are willing to finance only little more than half of the value of the transaction. Spreading the financing among multiple sources helps disperse the risk along with raising more funds for the transaction.
While mezzanine loans will not be found in residential real estate transactions, they are an important source of financing in the world of commercial real estate. In fact, they can often make the difference between a deal that moves forward and one that dies on the vine.