Mezzanine Financing – It’s Place in Commercial Lending

With today’s tight-credit markets conventional financing is not always available for some development purposes. Mezzanine Financing can be used as a bridge between final development and obtaining permanent financing. Mezzanine lenders however do have their own requirements in order to make the loan.

They typically only will look at projects with low loan to values, substantial equity in the project by the developers, and a viable exit strategy for the project to be able to take out the temporary mezzanine financing with the use of the funds.

Usually these loans are made to projects that have strong potential to produce income once the mezzanine financing is used to make the project complete. For example, mezzanine financing may be used if development money has been exhausted and additional funds are needed to complete tenant improvements so the project can produce rents.

By nature mezzanine loans are short-term to provide a bridge to completion with a term of twelve to eighteen months. If sufficient progress has been made they can usually be extended for up to six to twelve months.

One advantage of mezzanine financing is that the points, interest, and payments on the borrowed funds can be rolled into the loan amount. Thus the borrower does not have to service the debt during the term of the loan.

While mezzanine financing is not applicable to every project it can be a viable alternative to losing a development and hard earned equity to foreclosure.

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