Mezzanine/Equity Financing... What is it?

What on earth is Mezz/Equity financing anyway? If you're daily commute is anywhere near mine, you probably see billboards all over the place with a couple cowboys on it talking about Mezz/Equity while you’re driving down the highway on they way to work. It looks nice, but it doesn’t really tell me what a Mezz loan is or what do with it if I find one.

Here’s what it is, in a nutshell. Mezz financing is a high LTV second mortgage on a commercial or multi unit residential property. Loans must be made to a corporation. Loan To Value’s (LTV) are case by case, but can often go up to 100%. The mezzanine or equity portion is loan to cover the difference between the first mortgage plus down payment with the sales price. Did you ever think that someone could get a deal like that?

There are programs out there for commercial buyers to borrower their down payment money. These loans are not for everyone. Typically s peaking, these used to be very big loans on very high-end properties. Most loans start at 2 million or so and went all of the way up to the sky and the properties values started at ten million or so. However, now there are some lenders who are catering to the smaller investors needs. There are new programs out which will help an investor buy a half million or million dollar property.

Just to be clear, here's an example of what I’m talking about. An investor wants to purchase a multi unit apartment building for 1 million dollars. He can secure a loan from a local bank or portfolio lender for 750k. The problem is that he doesn't have the 250k plus closing costs for the down payment. Let's say, for argument's sake, that he only has 100k. For this example, just to keep the math simple, let’s assume there are no closing costs (or the seller is paying all of them.)

Property type: 20 apartments
Purchase Price: 1 million dollars
First mortgage loan: 750 thousand dollars

Down payment needed: 250 thousand dollars
The buyer can come up with: 100 thousand dollars

Shortfall: 150 thousand dollars

If you've never done a Mezz loan, at this point you tell the borrower goodbye. There’s nothing you can do. The deal is dead and you have to move on to the next one.

Now, there's another way. A Mezzanine lender will step in and lend the borrower the 150k needed to make the deal happen. Sounds too good to be true? It's not.

Here’s another example:

A buyer is under contract for a property for 500,000.

Property type: Combination of industrial & commercial space.
Purchase Price: 500 thousand dollars

Problem: The seller has a 200,000 assumable mortgage with a 50,000 pre-payment penalty. The mortgage is assumable and the seller will not pay the penalty (or he’ll pay it & jack the price up by 50 thousand dollars to get the money back from the buyer.)

The buyer can come up with 100 thousand dollars.

Shortfall: 200 thousand dollars.

There are very few banks or lending institutions that are willing to give anyone a 200 thousand dollar second mortgage. Banks generally do not like second mortgages on commercial properties. This is the perfect opportunity for a mezz/equity loan.

A Mezzanine lender can step in and come up with the 200 thousand dollars needed to make the deal happen.

These examples listed above are just a few of many.

Typical loan amounts can range from anything from 50k up to the sky. Properties must be held in the name of a corporation. The only other thing that you need to know is the property needs to be a good solid deal with positive rates of return. Vacant properties, properties in bad condition are generally not the typical mezzanine deal, even though they may be considered on a case by case basis. Don't even think of a single-family house or a property that the borrower wants to live in. Also, 2-4 family properties won’t be able to fly either. These programs are typically from 8 family properties and higher or medium to large commercial or industrial properties.

If you’re eyes aren’t popping out of you’re head at the amazing number of possibilities, please read the article again. Either I didn’t write it clearly enough or you didn’t get it. I’ll repeat it again. An investor can buy commercial or multi unit residential properties borrowing both a mortgage and the down payment. If you start to say to yourself that “no bank would allow a mezzanine second mortgage behind them,” don’t worry so much. Some Mezzanine lenders may offer the borrower the first mortgage as well as the mezz second. This should really open the door for you to look at financing bigger commercial properties without having to worry about where the buyer is going to get all of the cash to use as a down payment.

Don’t jump up and down too much. These types of loans are not cheap. The lenders certainly charge for this amazing deal, but it still enables investors to do unbelievable things without using up all of their own cash. Rates and terms are determined on case by case basis. It’s not uncommon for the lender to charge high rate sand points, or low rates, but the lender will take an equity portion of the property. It’s also not uncommon for the lender to look for additional collateral from the borrower. It used to be that big profit investing was only for the very rich. Down payments on properties worth 1 million dollars & up is a lot of money…. More so than most people can handle. This really levels the playing field and lets the smaller investor compete (and let’s you arrange the financing.)

Ari Miller has been with Gelt Financial Corporation, Southampton, PA, since 1993. Since 1998, Small commercial & Investor mortgages have been our specialties. In 2005, Gelt established the “Gelt Opportunity Fund 2005” designated for Mezz/Equity Financing. Gelt lends in PA, NJ, DE, MD, FL & NY phone: 800-355-4358, ext. 275; fax: 215-947-9101;
email: AriMiller@GeltFinancial.com