Commercial real estate has always been popular; investors tend to diversify their portfolios in favor of such investments due to their attractive risk/reward profiles. While the ongoing pandemic is undoubtedly impacting the commercial real estate industry’s climate, such investments continue to be as relevant as ever. And of course, where there’s demand, the supply needs to keep up.
One factor that significantly affects a commercial real estate’s operations is financing. While you may have big ideas, securing the funds to bring those ideas to life may sometimes prove to be a struggle.
Fortunately, that’s where mezzanine financing comes in. Few financing options are as beneficial to commercial real estate as mezzanine debt. If commercial real estate projects appeal to you and you want to know you can bring your ideas to fruition, here’s how mezzanine financing can help:
What Is Mezzanine Debt?
Simply put, mezzanine debt blurs the boundary between equity and debt. A mezzanine lender is introduced into a buyout to displace a portion of the capital typically invested by an equity investor. For commercial real estate transactions that measure up to millions of dollars, mezzanine loans offer an excellent way to be utilized.
In cases where traditional lenders may be reluctant to provide significant funds, mezzanine loans can help bridge the gap. Such lenders typically loan out to companies with excellent track records.
Where interest rates are concerned, mezzanine debts have higher costs of borrowing, typically in double digits, and lenders may sometimes demand equity exposure to augment interest income. As a borrower, you have several repayment options and, if your cash flow is restricted, you can capitalize interest charges, which is when interest is added to the loan balance.
Benefits of Mezzanine Debt
If you’re looking for financing for your commercial real estate project, mezzanine debt can offer a wide range of benefits to your project. Typically, funding for a commercial real estate project such as apartment communities, multifamily, office buildings, or retail shopping centers, is limited to 60% of the property’s value. In this case, when you need to acquire additional financing if you don’t have the funds to cover up the gap, mezzanine debt is a great way to cover the shortfall and prevent any hiccups.
Additionally, you can also obtain a higher return on equity in your property since you have to allocate less of your own funds to the property. Such loans are unsecured, and getting one isn’t as much of a hassle if you have an excellent investment history.
Mezzanine financing is also useful when you want to reduce your equity contribution if you have plans for numerous commercial real estate projects. You can use the saved cash on other projects by lowering the equity contribution for a specific project.
While mezzanine loans can be risky, this risk comes with high rewards since interest rates are typically higher than prime rates. Additionally, these loans offer flexibility in terms of the structure since investors can use a combination of debt and equity.
This means that if a property owner ends up defaulting, the investor will retain a share of the property. With shorter repayment periods than commercial mortgages, investors can receive high returns quickly.
It’s important to understand the benefits mezzanine financing offers to investors since, as a borrower, that gives you more flexibility to determine how you want to raise your funds. Mezzanine debts play a massive role in facilitating real estate deals and allow borrowers to raise the funds they need.
Real Estate Projects Mezzanine Debt Can Help You With
Now that you’re aware of an attractive type of financing for your commercial real estate project, here are a few types of projects you should consider exploring:
Multifamily: These properties include all kinds of residential real estate, excluding single-family. Typically including condos, townhomes, co-ops, and apartments, these projects are excellent since people will always need a place to live.
Office: Categorized according to suburban or urban, office buildings are the most common type of commercial real estate and are either single-tenanted or multi-tenanted. They range from small spaces to those typically found in cities, such as high-rise properties and skyscrapers.
Retail: These spaces include properties that house restaurants and retailers. These projects can also be either multi-tenanted or single-tenanted. It can become complicated since a shopping center, for instance, involves multiple factors, such as the number of tenants, concept, size, and trade area.
Industrial: This real estate project is typically located outside urban areas along major transportation routes and hosts several tenants. It includes four types: flex industrial, light assembly, heavy manufacturing, and bulk warehouse.
Hotel: This commercial real estate project includes establishments that provide meals, accommodation, and other services to tourists and travelers. It has boutique hotels, as well as hotels that are a part of larger chains. There are six types of hotel projects: boutique, limited-service, resort, casino, extended-stay, and full-service.
In the world of commercial real estate projects, mezzanine loans are crucial. They can make or break a deal and might just be what you need to bring your idea to the finish line. If you’re struggling to accumulate the funds for your big idea, then mezzanine debt might just be what you need.
It’s definitely worth looking into, and you should explore several lenders to determine who’s giving you the best deal. With research, evidence to support your project, and a big vision, you’re bound to secure a deal that’ll get the ball rolling.