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In recent months, the credit crunch has made the acquisition of commercial
real estate mezzanine loans decidedly harder for commercial real estate
development financing programs. Before you jump, it is important to
understand what most commercial real estate mezzanine loans (and lenders) will
entail. Today's mezzanine lender is not going to jump into the game
without having a comprehensive understanding of the due diligence issues
surrounding the project and the support the developer will be able to provide as
additional surety for retirement of the loan. These investors don't take
big changes; they take big chunks of your profit.
The typical mezzanine (or bridge) loan is a near-term financing vehicle
that is used to provide additional construction
phase project financing for a commercial real estate development
project. Most mezzanine lenders require personal recourse so you are
paying for the privilege of having the lender lend you your own money and you
pay for this service. The typical mezzanine/bridge loan terms are:
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Term: One (1) year.
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Interest Rate: 12% to 18%.
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Points: 4% to 6%.
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Exit Fee: 4% to 10%.
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Prepayment: Not Allowed - the interest on the loan is reserved out of
the financing at closing. That's right, a full year's interest
payments are ripped right out of the funding by the lender.
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Recourse: joint and several.
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Collateral: 150% to 250% of Loan Origination Amount.
As you can see, these are not inexpensive and there are plenty of
companies out there that are in the application fee business - meaning they will
charge you, "a nominal application fee" that you will pay and then
nothing will happen as these firms have no intention (and in some cases
resources) of completing the transaction. Recently, the states and the SEC
have been cracking down on the phony lenders and have sent some people to jail,
but forewarned is forearmed.
Rainmaker is here to help you with the mezzanine loan due diligence
documentation and the creation of your capital funding plan proposal.
Hopefully, we can steer you away from the charlatans and offer you some
structured finance alternatives to the mezzanine loan. Quite often, the
available entitlement investment incentives can be used to plug pre-construction
phase and construction phase funding gaps without having to accept a huge
dilution of the common equity ownership in the emerging transaction.
That's right; investment incentive entitlements can (in many cases) be used to
create and/or replace the equity funding requirements the developer and/or
owner/operator must otherwise bear.
Finally, have you considered a tenants-in-common equity syndication plan
for financing your project's needs as early as the pre-construction phase?
Now there is an alternative to the expense and angst that goes with the mezz
territory. You can use the equity syndication approach for almost any
project having a total development cost of at least $2.5 million. Click
here and find out more about these fractional
syndication tools.
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