Preferred Equity & Mezzanine Financing

Preferred Equity, Mezzanine, and Second Mortgages

The Importance of Preferred Equity, Mezzanine Financing and Second Mortgages

Increased demand for commercial real estate emphasizes the importance of mezzanine financing, which is an effective financial tool for small to medium-sized investors looking to purchase real estate using additional leverage.

Since many private real estate investors are not aware of all of their financing options, we believe it is important to educate borrowers and brokers who work in the sub-$5 million space and let them know about alternatives. This is how we democratize the commercial real estate market.

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    Some Things To Know About Commercial Real Estate

    There is a market for small-balance mezzanine funding, and there are many capital options that commercial mortgage brokers and people who are borrowing can use, including preferred equity, second mortgages, and mezzanine debt. Small-balance investors can use these options to complete their capital stacks.

    Want To Learn More About Mezzanine Financing?

    If you need mezzanine financing for investment and commercial real estate under $3MM, we would love to hear from you. We can provide you with detailed explanations and excellent resources. We are direct lenders, which means we are able to get you pre-approvals quickly and efficiently.

    Our Specialty—Mezzanine Financing Solutions

    Gelt Financial is one of the nation’s largest providers of mezzanine financing. With flexibility on property situations, including stabilized, value-add, and distressed, Gelt is able to provide quick and creative financing on acquisitions and refinances nationwide.

    Mezzanine Debt Rates

    Rates: Low to Mid Teens

    Fees: 1-3%

    Term: 6 months to 5 years

    Leverage: Up to 85%

    • Investment Size: $250,000 to $3,000,000

    • Property Condition: Stabilized, Value-Add, and Distressed

    • Property Types: Commercial (Multi-family, Office, Retail, Manufactured Housing, Single Tenant, Mixed Use, Self Storage, and more).

    Mezzanine Financing Defined—What Is Mezzanine Financing and How Does It Work?

    Simply put, mezzanine financing is a way for buyers to increase leverage on a property and to reduce the owner’s capital requirements.

    On a refinance, mezzanine financing is a way to pull cash out. On a purchase, it is a way to use less of your own capital. This is beneficial when people have a significant amount tied up in property but little cash.

    If you need a clearer idea of what this looks like and how this type of financing can be used, check out the examples we have put together.

    Mezzanine Financing Examples

    Example One: Nancy is under contract to purchase a neighborhood shopping center for $2 million and has a lender lined up to provide $1.4 million (70%) for the first mortgage. For Nancy to complete the purchase, she will need $600,000 (the remaining 30%) in cash.

    Alternatively, Nancy may want to consider bringing in a preferred equity or mezzanine debt provider to help her bridge the gap. Assuming that this source is comfortable going up to 85% of the purchase price, they would be willing to provide her with a $300,000 capital investment.

    This would mean that Nancy now has a leverage of $1.7 million ($1.4 million from the first mortgage and $300,000 from the preferred equity or mezzanine debt). Nancy now only has to come to closing with $300,000 of her own money.

    Example Two: In a refinance scenario, Jim purchased an apartment building for $1 million and spent the past year renovating the property. He successfully increased the net operating income, and now the asset has a value of $1.5 million.

    Jim has successfully increased his equity in the property and can use preferred equity or mezzanine debt financing in much the same way that someone would use a home equity line of credit to pull cash out of their primary residence.

    Let us assume that Jim has an existing loan balance of $700,000 after purchasing the property for $1 million or 70% of the original value. Now a lender might be comfortable providing Jim with preferred equity or mezzanine debt that would boost his leverage to 85% of the new value for a total loan of $1,275,000.

    This would allow Jim to cash out $575,000.

    Mezzanine Financing Structure—How Are Mezzanine Loans Structured?

    In terms of pay structure, mezzanine financing holds senior positions to common equity and is subordinate to the first-mortgage debt.

    Like a senior mortgage, it is debt, with a pledge of the ownership entity, and in some cases, a lien will be recorded against the property.

    A Quick Clarification About Mezzanine Debt vs. Equity

    For those curious about the difference between mezzanine debt and preferred equity, the main difference is that mezzanine debt is a loan while preferred equity is an equity investment.

    What throws some people off is that mezzanine debt and preferred equity can be seen as either a loan or just equity. In both structures, the borrower has to pay back the mezz or pref provider before they can cash out their equity.

    There are, of course, many other differences between these forms of finance, mainly in how they are structured on the technical side of things. If you want more information, you can call us anytime!

    Who Exactly Provides Mezzanine Financing For Real Estate?

    No other companies offer our small-balance mezzanine financing. This is why since 1989, Gelt has closed over 10,000 loans!

    We Do Flexible Commercial Real Estate Financing

    Taking every situation on a case-by-case basis, we offer excellent flexibility. Our goal is to accommodate your needs!

    Side Note

    When someone mentions a mezzanine debt investment, they are talking about a:

    Mezzanine loan

    Experienced investors often use terms like these, which laypeople may be unfamiliar with. For this reason, we have put together some terms, definitions, and additional questions and answers below. If you are new to the subject, these may be beneficial to your understanding of the subject as a whole.

    Preferred Equity, Mezzanine, and Second Mortgage frequently asked questions

    We can close very fast, usually within a matter of weeks. At Gelt, you are always dealing with the decision-makers with no need to go through multiple layers of approvals and investment committees. Additionally, we do not require appraisals or third-party reports, saving you time and money.

    While we like to know who we are dealing with, we are focused on the merits of the Property.

    Our typical rate is in the low to mid teen range.

    We love all types of existing commercial real estate, including but not limited to multi-family, office, retail, manufactured housing, self-storage, mixed use, medical buildings, hotels, single-tenant, and light industrial. We are also open to all types of situations, including stabilized cash flowing deals, value add deals, and even distressed deals.

    We do not invest in any land, ground-up development deals, or highly specialized properties.

    We are flexible and offer monthly payment options and other arrangements based on your needs.

    Mezzanine loans are typically collateralized by a lien on the property and a pledge of the ownership entity.

    At Gelt Financial, the maturity period for mezzanine loans is anywhere from six months to five years. However, we know that every situation is unique, which is why we provide unmatched flexibility.

    We can work with you whether you need a short-term mezzanine loan or need a longer-term solution.

    Mezzanine loans are often indirectly secured by property. What this means is if a borrower defaults, the mezzanine lender will not be able to take ownership of the property, but they may be able to take equity interests in the company that took the loan.

    This is a significant departure from senior loans since senior debt holders are able to foreclose on property when certain conditions are met.

    Mezzanine financing is considered expensive money because it is more expensive than senior debt.

    HOW MAY WE ASSIST YOU?

    Gelt Financial is here to help you with
    your Commercial Mortgage needs.

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