What Is A Mezzanine Financing Example For Real Estate?

By |4 min read|Published On: February 12th, 2022|

If you want to know whether or not mezzanine financing can help you, we are here to tell you that it can.

Mezzanine financing is one of the most effective tools for investors who need capital for their commercial real estate projects, whether you are buying a property or want to pull cash out of a property you already own. 

What is Mezzanine Financing?

A simplified explanation for mezzanine financing is that it is similar to a second mortgage. The result is that it protects from equity dilution while giving investors additional leverage and capital.

Does this strike your interest? If so, then keep reading! We have put together some brief examples of mezzanine financing for your reference.

Mezzanine Financing Examples For Real Estate

Mezzanine Financing Example 1: Using Mezzanine Financing To Pay Off High-Interest Debt

Project: $1.6 MM Office Building in Houston, TX

Value of Property: $6MM

Property Description: 60K SF, Office Building, Semi-stabilized Property

Type of Loan: Mezzanine – Collateral-based Loan

Summary: The owner was in the middle of paying off high-interest-rate debt and could not go to a bank for many reasons. But the owner needed to pay off the debt as quickly as possible.

Fortunately, they were able to get a mezzanine loan, a portion of which was used to pay off the debt, while another portion was used to renovate and stabilize the property.

In this situation, their mezzanine loan essentially functioned as a second mortgage. This type of transaction is possible when the existing first mortgage loan on the property is less than the value of the property. 

Using the mezzanine loan for renovations and stabilizing the property, the borrower was able to increase the property value further.

In cases like this, where banks will not provide additional capital, mezzanine loans can be a useful tool to get the necessary funding and achieve your overall objectives.

Mezzanine Financing Example 2: Using Mezzanine Financing To Fund A Value-Add Project

Project: $200K Mobile Home Park Investment Property in Indiana

Property Description: 27 units – 100% stabilized property

Type of Loan:  Mezzanine – Collateral-based loan

Summary: The owner needed money to invest in the improvement and expansion of a property, which meant it was a “value-add” real estate project. In this case, the property owner was an experienced real estate investor who just needed cash to finance the renovation. Since he had already owned the property, he was able to take out a mezzanine loan on his existing property to get the cash needed for the rehab. 

 

Work With An Experienced Mezzanine Financing Company

If you are looking for mezzanine financing, working with an experienced lender like Gelt Financial is a good idea. We have a long history of helping real estate owners secure the funding they need quickly and efficiently while also providing flexible payment options.

Whether you are a mortgage broker or a real estate investor, our knowledgeable team can help you get the most out of your mezzanine loan. Ready to get started? Give us a call today at 561-221-0900 or email us at info@geltfinancial.com.

Further Reading: Acquisition and Refinance Examples

We hope the above examples helped explain how mezzanine financing can sometimes work. But if you want to dive deeper into the uses of mezzanine financing, check out the examples below. 

Acquisition Example: 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 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. 

Refinance Example: 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. He can use preferred equity or mezzanine debt financing like someone would use a home equity line of credit to pull cash out of their primary residence. 

Let’s 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.  

Categories: Mezzanine Loan

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