Spotlight on Mezzanine Debt
This month’s spotlight focuses on mezzanine financing, a form of subordinated debt that has become increasingly attractive to real estate owners and developers. Fueled by the growth in new development and a wave of loan maturities originated between 2005 and 2007, many mezzanine lenders are expecting their loan volume to double in 2016. With some mezzanine lenders willing to go up to 85% leverage on a project, mezzanine loans are able to fill a substantial piece of the capital stack for an owner that is willing to add leverage to his/her investment in return for retaining the potential upside of the deal. Interest rates for mezzanine financing vary depending on a number of factors, including asset type, location, sponsor, and deal structure, but typically range between the high single digits to low double digits with one or two points charged by the lender.
One important distinction between mezzanine financing and other subordinated or second trust financing is that mezzanine debt is not secured by the property, but rather the interest in the ownership entity. This allows a mezzanine lender the ability to engage a more rapid seizure of the underlying collateral in the event of a default. The foreclosure of this collateral, while typically quicker than the foreclosure process on a mortgage, only entitles the mezzanine lender to foreclose on the equity interest in the property owner and still leaves the mortgage against the property intact. Due to the rather complicated relationship between mortgage lenders and mezzanine lenders, inter-creditor agreements are typically executed at loan closing, which outline the rights and remedies between the parties in the event of a default.