Mezzanine Loans

The capital stack has evolved over the years, with the primary change being the complexity, structure and pricing of the tranches. When discussing mezzanine debt, it's important to understand that pricing will be affected not only by the high-point of leverage but also how low in the capital stack it sits (the attachment point). Additionally, the use and structure of mezzanine debt will also affect pricing. Though mezzanine loans are usually non-recourse (with no principal repayment guarantee), in rare cases, an entity with a strong balance sheet can reduce its cost by providing the guarantee as a credit enhancement.

Unlike senior debt, which is directly secured by the property via a mortgage, a mezzanine loan is only indirectly secured only by the underlying asset. The collateral for a mezzanine loan is a pledge of the equity/partnership interests of the borrowing entity. That pledge is evidenced by a Uniform Commercial Code-1 (UCC-1) filing. For asset specific capitalization, the borrowing entity is usually the property-owning entity.

When arranging mezzanine financing, it is good business practice to confirm that the potential provider has previously negotiated an intercreditor agreement with the anticipated senior debt provider. This agreement lays out the lien positions, rights and remedies of the creditor parties, and as such, when newly negotiated, can increase closing times and costs for the borrower (who almost always pays closing costs). 

Mezzanine Capital Stack Notes

Development Mezzanine:
  • Senior Mezzanine will have an attachment point of 50% LTC +/- and a last dollar exposure of 65% LTC +/-
  • Junior Mezzanine will have an attachment point of 65% LTC +/- and a last dollar exposure of 80-85% LTC +/-
  • Due to the common current pay requirement for a mezzanine loan, the amount held back from proceeds will usually reduce the true Max LTC to 82-83%.
  • Pricing will tend to be in the low double to high double digits depending on first/last dollar exposure.
Long-Term Mezzanine:
  • Senior Mezzanine will have an attachment point of 55% LTC +/- and the last dollar exposure of 70% LTC +/-
  • Junior Mezzanine will have an attachment point of 70% LTC +/- and the last dollar exposure of 85-90% LTC +/-
  • Pricing will be in the mid-single digits on core and high single digits on lesser-quality assets. Low double digits for lower quality / junior mezzanine-secured assets

We source, structure and help close the following types of Mezzanine loan transactions:

  • Junior/ Senior Mezzanine Loans
  • Full/partial accrual pay options for transitional and development deals
  • Long-term co-terminus loans for stabilized assets
  • Fixed/floating/participating structures

We maintain ongoing relationships with a large variety of Mezzanine debt providers including:

  • Insurance Companies
  • Real Estate Funds
  • Private Equity Funds
  • Hedge Funds
  • Crowdfunding Platforms
  • EB-5 Regional Centers
  • Israeli Bond Offerings
  • Public and Private REITs
  • Private Family Offices
  • Investment Banks