More on mezzanine loans
I have been writing a bit lately about a trend I am seeing toward more and more mezzanine debt being put on properties as a gap between the LTV required by a bank and the equity a buyer brings to the table.
The Wall Street Journal sees the trend too, as evidence by a story today. Novices may ask: what is so attractive about mezz loans? Think of it like a second mortgage. For the buyer that does not have the larger amounts of cash to do a deal in this market, it means the ability the lever yourself into a deal you could not otherwise do while still being able to get high returns on the back end. If you are the lender, it means getting higher rates of return than a first lender on the mezz loan, plus the ability to wipe out the buyer and take over the property dirt cheap (insert groan here) if the buyer defaults on the mezz loan. That is why you are seeing seasoned, big-name investors doing mezz deals. If the buyer performs you it a double; if it fails you could hit a home run.
(Update: But as Doug Cornelius rightly points out in the comments and here in his excellent commentary, mezz lending is not for the faint of heart, nor is it, as the article (and perhaps my post) might surmise, a guaranteed win. Negotiating with the lender and good legal documentation are also critical.)
The Wall Street Journal sees the trend too, as evidence by a story today. Novices may ask: what is so attractive about mezz loans? Think of it like a second mortgage. For the buyer that does not have the larger amounts of cash to do a deal in this market, it means the ability the lever yourself into a deal you could not otherwise do while still being able to get high returns on the back end. If you are the lender, it means getting higher rates of return than a first lender on the mezz loan, plus the ability to wipe out the buyer and take over the property dirt cheap (insert groan here) if the buyer defaults on the mezz loan. That is why you are seeing seasoned, big-name investors doing mezz deals. If the buyer performs you it a double; if it fails you could hit a home run.
(Update: But as Doug Cornelius rightly points out in the comments and here in his excellent commentary, mezz lending is not for the faint of heart, nor is it, as the article (and perhaps my post) might surmise, a guaranteed win. Negotiating with the lender and good legal documentation are also critical.)
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