Mezzanine loans are very much like a second loan (or junior lien), except a mezzanine loan is secured by the stock of the company that owns the property, as opposed to the actual property.
If the company (usually a LLC) isn't able to keep their payments current on the property, the mezzanine lender can foreclose on the stock of the company just a few weeks, instead of the usual year-and a -half wait to foreclose a mortgage in numerous states across the country.
The stock of a company, is personal property and is able to be seized a lot quicker. Basically, whoever owns the company also owns the property, and thereby controls the property.
Mezzanine loans tend to be pretty large in loan size. Lining up a mezzanine lender for a loan of less than $1 million is going to be difficult. Commercial lenders tend to want to be involved in larger projects.
Like many commercial loans, there are three uses to get one. The owner wants to pull out some equity on their $15 million apartment complex with a first mortgage of $6.5 million, but decide otherwise because the first mortgage has either a large defeasance prepayment penalty or a lock-out condition. In cases like this, the owner may be able to get a $4.5 million mezzanine loan.
Let's say a seasoned apartment building investor would like to buy a multifamily property that is 40% vacant in a very nice part of town. Suppose that the acquisition price is $12 million (but the apartment building is 40-percent NOT occupied) and the existing first lien is $6.8 million.
Did you know some mezzanine lenders may be prepared to lend as much as $4 million which comes out to 90% loan-to-value. Let's keep in mind that the buyer is a seasoned investor who is going to increase that value of the property to $15-16 million. Now you can see that the mezzanine lender's risk level is down to 75% loan-to-value using projected value.
New construction is the last option a mezzanine loan can be used for. Some commercial construction lenders are restricted to make a loan up to 65% of loan-to-cost. If the total cost to build was $18 million, the developer would ordinarily have to come up with 35% of $18 million or $6.3 million. In most situations, it is a lot of money for a developer to come up with.
A $1.8 or $2.7 million mezzanine loan would help the developer's dilemma in a big way up to 75 or 80% financing. So, now the transaction works like this. The commercial construction lender offers $11.7 million, the mezzanine lender would give a $2.7 million mezzanine loan, and the developer would "only" have to come up with $3.6 million.
Loan Amount $1 million minimum
Loan Term 1 to 3 years.
Maximum LTV up to 90%