Commercial real estate investors know that between the listing price, closing costs, and additional funds needed for construction and rehabilitation an external financing partner is required to help deliver capital for their project. However, banks have stringent lending policies and often loan applications take too long for time-sensitive commercial property opportunities. Because of this, many CRE investors turn to mezzanine financing.
How Mezzanine Financing Works
Instead of taking out a loan, mezzanine financing involves an investor (or group of investors) willing to advance people the funding they need (usually up to 80%) in order to buy real estate and turn it around for a profit. This can be for anything from single family houses, to multifamily rentals, office space, and everything in between.
How Mezzanine Financing Differs From Bank Loans
Unlike conventional bank loans, mezzanine financing does not hinge upon a CRE investor's credit rating. Instead, mezzanine financing focuses on the financial history and profitability of previous properties and real estate investments to determine approval.
Mezzanine financing is treated as equity funding, so CRE investors do not take on any debt. By not taking on debt or having their credit rating impacted, CRE investors can seek additional financing from other sources for things like contractors, repairs, and rehab. It should be noted that mezzanine lenders like to see investors put up some of their own money to show that they are willing to have a personal financial stake in the purchase, as well as seeking funding from other sources.
There is no form of financing that is without risks, and mezzanine financing is no different. As stated above, this type of financing is based on equity, using the property being purchased as collateral against the received funding. This means that if a CRE investor defaults on paying back the funds, the ownership of the property is transferred to the mezzanine lender, leaving the investor with nothing. That being said, financing professionals want CRE investors to succeed, because the more successful a commercial property is, the more profitable it will be for them, as well. For these reasons, many mezzanine lenders will work closely with CRE investors to ensure success for all parties involved.
While mezzanine financing does carry some risks, it is much easier and faster to secure than a conventional bank loan. If you have a good history of strong, profitable CRE investments, mezzanine financing might be the ideal solution for your next project.