Top Benefits of Mezzanine Financing

Posted On Tuesday, 29 December 2020 13:05

The Cambridge English dictionary defines mezzanine as ‘an extra floor between one floor of a building and the next floor up.’  Mezzanine financing roots its name from this definition, meaning it is right above a senior debt in capital investment. Mezzanine financing is an essential funding tool for people who invest in real estate, or who have their own business. It can assist in bridging the gap between the equity they have to provide for a transaction and the senior debt financing sourced from lenders. It is mostly in the form of an additional debt an investor can take on to finance an acquisition of commercial real estate, apartment communities, multifamily, office buildings, and retail shopping centers. It reduces the amount of equity an investor needs when getting the funding in order.

Understanding Mezzanine Financing

Small to medium-sized businesses can have difficulty in acquiring funding to fulfill their investment plans. In these hard times, mezzanine loans offer a comparatively quick avenue to substantial funding and an effective means used by companies or individuals to finance their expansion costs. Mezzanine funding offers a satisfying arrangement, which permits customized solutions to welcome the cash flow. This generally entails the loan needs to be repaid towards the end of the loan term.

Read well into the terms or plans offered because mezzanine loans will generally require timely payments on the loan, higher interest rates, or the lender may warrant ownership or some form of equity interest in the company. Mezzanine financing generally requires minimal paperwork from the borrower, leading to short term contracts, bringing you closer to your real estate or business goals.

Benefits of Mezzanine Financing

Flexibility

The main advantage of mezzanine financing is that it provides the capital when you are unable to obtain it elsewhere or do not meet the criteria to access the amount of funding you are in need of. This is why mezzanine financing is often described as the bridge that engages challenging objectives such as the acquisition of new commercial real estate opportunities, an apartment complex, shopping centers, or multiple office buildings. It may not be your last option for funding, but it provides flexibility when it comes to negotiating the terms of your loan.  Make sure to pay your loan in a timely manner to avoid a default on your loan which could lead the lender to hold a part of your equity and sell it to another party.

A reduction of equity

Mezzanine financing reduces the amount of equity or the ownership of assets that may have debts or other liabilities associated with them to fund an acquisition.  It helps acquire a greater return on equity in a property because the investor is required to invest less of their own savings or money. The reduction in the equity requirement has important benefits, for example, a company that invests in a new business building complex can use that equity for another deal, which would facilitate a better return of investment. It is able to assist those who do not have enough capital and lessens the means of bringing in more financing partners who could threaten their ownership.

Accessibility

Acquiring a mezzanine loan is effective because it allows an investor to layer a junior or smaller loan on top of a primary loan. It combines the elements of a senior debt sourced from a bank and equity-based financing from direct investors. Mezzanine financing is easily sourced through private equity groups, mutual funds, buyout firms, or other insurance entities. When compared to a bank loan, mezzanine debt is commonly detached from the borrower’s assets so the cost of obtaining financing and interest rate is generally higher than a senior loan.

Protection

Mezzanine loans are structured to guarantee the investor will retain outright control of their property. Mezzanine lenders are passive and do not interfere with the business affairs of the investor. It also works great for companies that have not evolved from the start-up phase but do not have the capital to finance the next stage of development on their own. Growing companies with a reliable cash flow can use a mezzanine loan when seeking to expand their business funding and be equipped with helpful advice on strategies and guidance on current business insights.

Higher funding

Mezzanine funding promises higher amounts of funding than an asset-based loan or assistance from a bank. High valued real estate transactions are a prime example of how mezzanine loans can be used to profit both property owners and real estate investors.  It makes the deal feasible for all parties concerned. In commercial real estate, the main source of financing is usually not more than 60% of the value of the property. A buyer needs to access financing if they are unable to put up enough to complete the purchase. Spreading the financing to multiple sources also helps reduce the risk of raising the capital. Mezzanine financing is an ideal way to make up the balance that is needed to make the deal push through.

In Closing

Instead of trading a large amount of your personal equity for capital to finance your commercial real estate project or business expansion plan, borrowers can get the money they need from mezzanine financing.  It bridges the gap and minimizes the risk of losing their equity such as borrowing from more traditional means like a bank. 

Mezzanine financing is a secure and flexible solution to financing commercial real estate plans, such as office buildings or apartment communities, when you are unable to put the cash up front, bringing you closer to attaining your projected goal.

Rate this item
(0 votes)

Agent Resource

Limited time offer - 50% off - click here

Realty Times

From buying and selling advice for consumers to money-making tips for Agents, our content, updated daily, has made Realty Times® a must-read, and see, for anyone involved in Real Estate.