Mezzanine Debt Financing
What is Mezzanine Debt Financing?
Mezzanine debt financing serves as a source of secondary debt financing, which sits in second priority behind the senior loan on the subject collateral property. This type of financing can provide investors and developers with some relief in terms of the size of their equity raise – but at a cost as mezzanine debt interest rates typically start in the high single digits to low double digits and higher.
Mezzanine debt is often utilized on heavy value-add and/or construction projects that expect higher returns, and can support the cost of those higher interest rates on a component of the capital stack.
Advantages of Mezzanine Financing for Borrowers:
• Improve levered returns for investors and developers
• Typically more flexibility in the structure of interest payments, with a current pay component and accrued pay component
• Lower the equity raise amount
What to consider when using Mezzanine Financing
• Higher cost of capital
• Impact on project delays – potential need to replenish interest reserves
• Allowance for mezzanine financing by senior lender, and associated legal cost