Mezzanine Financing

Mezzanine loans are structured to yield at least 20% per annum. Mezzanine loans provide part of the equity capital required in real estate development deals.

Most developments involve two financing stages: the acquisition financing stage and the construction financing stage. Developers are typically only able to borrow from a traditional lender (i.e. a bank) between 50% and 65% of the total acquisition purchase price.  Thus a number of developers seek mezzanine financing at a higher interest rate to enable them to finance up to 85% of the total acquisition. Mezzanine financing is secured against the property as a second mortgage.  This acquisition and mezzanine financing stays in place until the developer has arranged construction financing.

Construction financing is generally advanced once the developer has obtained all necessary planning approvals and has pre-sold approximately 70% of all proposed units. In addition to funding construction, the construction financing is used to repay the acquisition and mezzanine financing.

Mezzanine financing helps a land developer pay the preliminary costs related to land acquisition, rezoning, architectural design, interior design, engineering, marketing, advertising, preparation of building permit drawings, preparation of tenders to builders, etc. These activities can take a year or more.

Mezzanine loans carry more risk because a mezzanine lender is second in line to the primary lender. For this reason and because this type of financing is not available from banks or other institutional lenders, this is expensive money. That is why we structure our mezzanine loans to yield at minimum 20% per year. First mortgages yield less but are safer, mezzanine loans yield more but are riskier.