Talking about mezzanine financing in the real estate industry might be a new term to begin with, along with being a tad bit confusing. Mezzanine funding enables real estate developers to close the gap between their equity and the senior debt they will receive from a lender. Usually, it’s in the form of a subordinated debt, although it may have an element of equity. Although an investor would pay a higher mezzanine financing interest rate, it will allow them to receive a higher rate of return on their investment.One very important thing to consider while reading about mezzanine financing in the real estate industry is understanding mezzanine financing real estate loans. These loans are quite unheard off and are unique in their own sense. In a building, the mezzanine is a floor or storey between two more floors or storeys. It’s not entirely the first floor or the second floor — it’s a way to connect the two. This is how the mezzanine funding got its name. Mezzanine financing for commercial real estate is not entirely debt financing or equity financing, it incorporates the two in the sense that if the loan defaults, it enables the lender to lend money in a debt financing system but convert to an equity interest.
You’ll find something that’s classified as warrants within the mezzanine debt framework. This sounds scary, but they are simply equity terms attached to the debt that allow any subordinated debt to increase in value and also allow flexibility when it comes to dealing with someone who owns debt bonds. Technically, mezzanine funding is one of the higher-risk forms of lending as it incorporates debt financing and equity financing. In general, mezzanine funding for commercial real estate is sought to fund a particular project. It may also benefit the possibility that potential borrowers will come on board; as mezzanine financiers are seen as long-term buyers, they are more favourably regarded by other lenders who may enter the picture in the future.
Now, you might be wondering as to how are the mezzanine financing loans structured? Although mezzanine financing can be incredibly effective in the right circumstances, many borrowers do not fully understand how these loans are structured — especially when it comes to real estate. Generally, most of the mezzanine funding of real estate loans have some basic characteristics in common when it comes to the way they have been organized.
The preferred equity they sell is junior to subordinated debt, which means that it is mostly treated as equity by senior members of the finance hierarchy. Mezzanine funding loans often typically provide a fixed part of the return. This makes them less diluted than common or general equity. Mezzanine lending often provides no major amortization and is more often than not unsecured and more lucrative than senior debts. Of course, mezzanine debt is subordinated to senior debt and senior debt to common equity debt. These are not the only distinctions between the funding of the mezzanine and other common debt structures. However, where they vary the most is that mezzanine financing is most efficient and attractive in particular situations.
From here on, when we have developed a fair understanding of the topic, it’s imperative that we focus on as to why to use mezzanine financing in the real estate industry. Generally, mezzanine financing for commercial real estate is a great alternative to close the gap after a loan has been issued by the original lender or lender. This may result in the purchaser having to contribute less of their own funds to the pool to afford purchasing real estate, because although the financing cost is higher, the mezzanine financing results in less money being pulled out of your wallet. This can lead to an initial decrease in annual earnings, but to an increase in the return on equity. Mezzanine financing can also be a powerful recapitalization tool, leveraged buy-outs, management buy-outs, growth capital, acquisitions, and shareholder buy-outs outside the real estate investment world.
Lastly, as we close the discussion on mezzanine financing and the real estate industry, we might think of one thing: “How to choose between mezzanine finance providers?” With so many lenders providing mezzanine financing for real estate loans, how do you know which organisations are the highest and the safest bet for your investment? In general, there are a few main factors that let you know where to put your faith. First of all, since mezzanine lending can be very complicated (and potentially high-risk), you want to partner with a well-established lender having a long history of mezzanine-specific loans. You’ll also want to find a lender that provides fair loan terms, a clear loan application and underwriting procedure, and full accountability throughout the procedure. Finally, it is crucial that the lender you choose is available. Mezzanine financing for commercial real estate is complicated, so the opportunity to talk to a human being if it is necessary to learn more about the structure of your loan is completely crucial. And remember — if you want to know more about how a certain lender works inside mezzanine financing terms and other real estate lending frameworks, your best bet is to talk to them directly.
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Belonging to Gurgaon, he is currently a student at Kirori Mal College pursuing Economics Hons. Ishaan is a fun loving person, soft at heart and a confident and dedicated soul. You can typically find him working for his endeavours or attending a Model United Nations conference. He likes to keep himself aware about the happenings around the world!