Commercial real estate investment is one the most sought-after ways to expand and diversify the investment portfolio. It demands robust financing, which is sufficed through commercial mortgages. However, there can be a situation where the gap between the senior debt and the equity keeps widening. Here's where the role of mezzanine financing comes into play. What is it? What are the benefits of getting a real estate mezzanine loan in Charlotte, NC? We will discuss everything in this blog.
Understanding the Concept of Mezzanine Loan
From the architectural point of view, the mezzanine floor is the transitional floor between the building's main floors. The concept remains similar in commercial real estate financing.
Mezzanine financing is the kind of loan that bridges the gap between the senior mortgage (previously provided by the lender) and the equity (raised through the investors). Much like the the ground floor and mezzanine floor of a building, mezzanine financing remains above the senior loan in the capital stack of commercial real estate investment.
Here are a few salient attributes of the mezzanine loan:
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The lender agrees on a mezzanine loan amount after considering the projected equity, which means that the amount would be lesser than the senior debt.
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Mezzanine loans can be either unsecured or secured by a second lien on the commercial property.
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The term of the loan is typically shorter than the senior debt.
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Mezzanine loans are interest-only mortgages.
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Being subordinate to the senior debt, mezzanine loans are considered riskier; nevertheless, they have their own set of benefits as well.
Here is an example to help you gain more clarity on how the mezzanine financing works:
Let’s say, commercial real estate has a purchase price of 1 million, generating a net operating income of $100,000. You can acquire a $600,000 mortgage from a lender, and still require $400,000 to close the deal. In case, you are falling short of that amount, let’s say by $200,000, there are alternative funding options like getting a mezzanine loan from a different lender. Considering, the annual pre-tax income, if you get a mezzanine loan at 10% interest, your pre-tax returns against the $200,000 equity investment would go up by 25% as opposed to the 18% of the $400,000 equity investment.
Benefits of Mezzanine Loan for Commercial Real Estate
Now that we are clear about mezzanine financing, and what it entails, here are a list of benefits that you can enjoy through it:
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It significantly minimizes the amount of equity required for financing the expansion or development of a commercial real estate project.
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The return on the equity investment is substantially high.
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It helps in achieving a better debt-to-equity ratio.
Conclusion
On a concluding note, mezzanine financing helps boost the returns by minimizing the equity amount required in the commercial real estate deal. Make sure that you reach out to a reliable lender to get the best deal in terms of loan amount and interest rates, enabling you to reap the advantages of getting a real estate mezzanine loan in Charlotte, NC.
