Mezzanine Lender Specialists

Quite often, a Borrower may find that their existing first mortgage has a yield maintenance prepayment penalty that effectively prevents refinancing, and that the first mortgage Lender will not allow a second mortgage. In this situation a mezzanine loan can free up trapped equity allowing the Borrower to leverage their assets and take advantage of attractive business opportunities.

Alternatively, if a Borrower is seeking higher leverage for an acquisition than a bank or conduit Lender is comfortable with, the answer may be a lower loan-to-value institutional first mortgage in conjunction with a Mezzanine loan. We can structure both parts of a bank/mezzanine loan, including negotiating the terms of the intercreditor agreement. Our Direct Private Lending affiliates regularly work in tandem with our institutional Lenders.

Mezzanine lenders typically want big projects. If the property you are trying to finance is not worth close to $10 million, you may have a hard time attracting the interest of any mezzanine lenders.

Mezzanine Example

Let’s assume that you purchased a $10,000,000 shopping center in 1998 and that you obtained a typical 10-year, fixed-rate mortgage for (75%) $7,500,000 at around 8%. Let’s say that the property has appreciated considerably and that it would now appraise for around $15,000,000.

You decide that it would be good to 1) refinance to reduce the interest rate from 8% to today’s going rate of approximately 4.75%, and 2) you further decide that you would like to take out some of your equity to finance the purchase of other properties.

At the time you bought the property you borrowed 75% of the value. Now that five years have elapsed and the value has risen sharply, you once again want to borrow around 75% of the property’s value, ($11,250,000) which would result in $3,750,000 cash out before closing costs.

The loan has a standard "yield-maintenance" prepayment penalty, which would currently exceed $1 million making a refi unattractive, AND the loan documents clearly prohibit placing a second mortgage on the property. What to do? How can you tap the "trapped" equity in your property? Enter Mezzanine financing.

In the above example, in 1998 there was $2,500,000 of equity in the deal. Now that equity has grown to approximately $7,500,000.

Let’s assume that you own 100% of the stock of the corporation that owns the property. You can pledge your ownership interest (your equity) as collateral for a Mezzanine Loan.

That’s it in a nutshell. Since you cannot refinance your first mortgage (because of the prepayment penalty), and you cannot offer a Lender a second mortgage (because the first mortgage documents do not permit it), the remaining significant card left to play is a pledge of the equity interest, which in the current example is worth around $7,500,000. A Mezzanine loan typically calls for control of the property to pass to the Mezzanine Lender in the event of default.

In a situation like the above example a Mezzanine Lender would be very happy to lend, for example, $2,500,000 which would result in leverage (based on today’s values) of only around 66%. So even though the Borrower in this example is stuck with a higher-rate first mortgage, they will be able to gain access to some of the additional value that has been created in this property over the last five years.

With conservative leverage (66%) a deal like this would probably be priced around 12%. The most desirable way to structure this loan would be to have all the rents paid to a "lockbox" account where the first mortgage, Mezzanine loan, taxes and insurance would be paid first, and then the owner would receive all surplus cash flow.