Mezzanine financing has been gaining in popularity among seasoned investors. However, some newer property investors shy away from mezzanine financing because they don’t know how it works.
Mezzanine Financing is a Hybrid Solution
Most commercial real estate investors know that financing comes in one of two forms – debt and equity. Debt financing exists in the form of commercial loans, where installments are made to pay off the balance within the terms of the loan. Equity financing typically involves giving lenders a stake in a property, and the financing is repaid from a percentage of the revenue generated, or until the lending partner is bought out. Mezzanine financing is a hybrid of debt and equity, usually with longer terms and more flexibility than traditional loans. The debt portion of mezzanine financing is subordinated, so it is prioritized lower on the hierarchy of financial obligations.
How Mezzanine Financing Works
Mezzanine financing allows commercial real estate investors to take on larger transactions and projects with much more flexibility than traditional loans would allow. Since mezzanine loans typically mature in five to seven years, borrowers can make interest-only payments for the first few years without worrying about the principal balance. Mezzanine financing is repaid in one of three ways:
- Payable In Kind (PIK) interest
- Cash interest
- Equity stake
The versatility and flexibility of mezzanine financing, combined with its subordinated debt, make it an accessible and robust solutions for commercial real estate.
When to Use Mezzanine Financing
Mezzanine financing solutions are very versatile, and can be used for partner buy-outs, as well as to acquire and renovate properties. Most commercial real estate investors use mezzanine solutions on revenue-generating properties. That way, there is an existing property asset that can be used to repay the financing, and improvements along the way can increase the income from that property.
At The Capital Rams, we provide mezzanine financing solutions for commercial real estate transactions and projects nationwide. We structure our mezzanine loans around the overall profitability of a property to ensure you get the financing you need to carry out your plans. Contact The Capital Rams today to learn more about our mezzanine solutions.