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Mezzanine Loans

In today’s dynamic commercial real estate market, borrowers face a significant financing gap created by the substantial volume of CRE debt reaching maturity—estimated at $957 billion in 2025—combined with tightened senior lending standards and adjusted property valuations.  Mezzanine financing has become an essential component of the capital stack, particularly as traditional banks have pulled back from commercial real estate lending.  Borrowers can obtain mezzanine funding, even when their senior debt lender (e.g., CMBS or conduit-type loans) precludes borrowers from pledging their property for subordinate financing.

The mezzanine lending market is currently dominated by non-bank alternative lenders, including private credit funds, specialized real estate finance companies, and the debt arms of major private equity firms.  These players leverage significant capital pools, flexibility, and speed of execution to fill the void left by retreating banks.

The terms below outline the typical requirements from mezzanine lenders in today’s market. These terms may vary depending on the financial strength and experience of the borrower and the type of property being financed.

1. Structure: Pledge of 100% of the partnership, membership interest, or common stock in the borrower, or the entities which own the borrower
2. Product Types: All major commercial uses including multifamily, office, retail, and industrial and possibly other product types based on a particular lender’s loan criteria.  In the current market, lenders strongly favor multifamily, industrial, and specialty sectors like data centers due to their stronger fundamentals, while office assets typically require higher pricing and lower leverage.

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    3. Market: Nationwide
    4. Loan Size: $1 million minimum; no maximum loan amount
    5. Loan Term: Up to 3 years, with options for additional 1-year extensions.  Terms are often structured to be coterminous with the underlying senior mortgage, with durations ranging from 1-7 years depending on the transaction type.
    6. Maximum LTV: Up to 85% of the “as-is” appraised value or purchase price, whichever is less
    7. Interest Rate: All-in rates typically range from 8% to 20%, with current market conditions often pushing rates into the low-to-mid teens.  Rates can be structured as either fixed or floating (typically over SOFR with significant spreads).  Many loans include Payment-in-Kind (PIK) options, allowing borrowers to defer cash interest payments by adding accrued interest to the loan principal, enhancing cash flow flexibility during property stabilization or development phases.
    8. Debt Service Coverage: 1.0x to 1.3x depending on property type
    9. Amortization: Interest only
    10. Prepayment: Negotiable lockout period, typically no less than 6 months
    11. Origination Fees: Market rates currently range from 2% to 5% of the loan amount, reflecting the complexity and subordinate nature of these facilities.
    12. Exit Fees: Negotiable.  Some lenders may include equity kickers, particularly for riskier propositions, granting them potential upside beyond the fixed interest rate upon a capital event like a sale or refinancing.
    13. Reserves: Real estate taxes, hazard insurance, replacement reserves, redevelopment costs (if any) and mortgage interest (as may be required)
    14. Ownership: Single asset, bankruptcy-remote entity
    15. Recourse: Depends on the lender.  If the loan is non-recourse, the lender will typically require the borrower to provide limited recourse for “bad boy” or standard carve-outs, including fraud, misapplication of funds, waste, property taxes, and environmental issues.  For construction projects, completion guarantees from the sponsor are standard requirements.
    16. Deposit: Depends on the lender with such amount payable to the lender upon acceptance of the their term sheet for site inspection, third party costs, legal, and closing costs.  The deposit will vary depending on the lender and/or the property or project to be financed.
    17. Closing: 1 to 4 weeks after loan approval and lender’s receipt of deposit
    18. Third Party Reports: MAI appraisal, Phase 1 environmental, feasibility, and any other reports as required by the lender
    19. Intercreditor Agreement: A critical document that establishes the framework governing the rights, remedies, and obligations between the senior mortgage lender and the mezzanine lender. Key negotiating points include cure rights, enforcement rights, standstill periods, purchase options, and transfer rights. This agreement has become increasingly important in the current market environment as defaults and workouts increase.

    Partner With NetLeaseX Capital

    Ready to explore mezzanine financing solutions for your commercial real estate project?  Contact Ron Zimmerman at (513) 621-1031, via online chat on this website, or email your project summary to ronz@netleasex.com.  Whether you’re seeking capital for acquisitions, development, or recapitalization, we’ll connect you with the right mezzanine lending partners to bridge your financing gap and optimize your capital stack.

    If you would like to discuss your project and funding requirements, please call us at 513-621-1031 or send us an e-mail summarizing your project.

    Using Preferred Equity to Increase Real Estate Investors’ Leverage and Enhance Returns
    White Paper
    Original:  September 2022
    Updated:  October 2024

    This whitepaper discusses how NetLeaseX works with real estate investors to structure investment relationships with “below the radar” high net worth investors, family offices, registered investment advisors, equity funds, and institutional investors to help such investors, including non-institutional sponsors and even new sponsors who lack financial resources, to raise preferred equity so that they can close more deals and earn more fees.

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    Strategize With Preferred Equity
    The Scotsman Guide
    December 2018

    This article gives an overview on how real estate investors can increase leverage by raising preferred equity to fill the gap between the amount an investor can raise in senior debt financing and the sponsor’s equity investment.  This article further discusses various ways preferred equity investments can be structured including, for example, creating one or more tiers, waterfall priority order (e.g. A/B structure vs. pari passu), recourse, repayment schedules, control rights, and capital shortfall requirements.

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    The Power of Stretch Loans for Family Office Investors

    This article explores how commercial real estate investors can secure custom stretch loans from high net worth and family office investors, combining senior debt and preferred equity features to obtain high-leverage, short-term bridge financing with favorable pay rates.
    Famcap.com | May 2024
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    Throw Out A Lifeline
    The Scotsman Guide
    July 2020

    This article discusses how real estate investors may be able to raise rescue financing to cover operating losses and/or mortgage payments during the Covid-19 crisis.  Raising rescue financing is especially important for real estate investors who may face substantial liability due to personal loan guarantys if their lender were to foreclose; thus, triggering a forced sale at a fire-sale price.

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    Ride To The Rescue
    The Scotsman Guide
    August 2020

    As a follow-on article to “Throw Out A Lifeline”, this article discusses how rescue financing, in effect, works like bridge equity, a temporary infusion of cash from an investor that well eventually be bought out via refinancing or sale when real estate markets normalize.  This article further lists various ways how rescue financing can be structured both as debt and equity investments.

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    NetLeaseX Capital Offers Family Offices Direct Access to Rescue Financing Investments in Real Estate
    Famcap.com
    October 2023

    This article discusses how family offices and other sophisticated real estate investors can access NetLeaseX’s platform to freely review NetLeaseX’s pre-screened, “investment-ready” transactions, including rescue financing, preferred equity and co-GP investment opportunities.  The article further discusses why NetLeaseX believes that a better way to invest in commercial real estate in today’s market is to provide rescue financing to sponsors, particularly in multifamily.

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