What is a Mezzanine loan. Gelt lends up and down the cap stack, debt and Equity.
“Marcy: Hi.
Jack: Hello, Jack and Marcy, making a socially distanced video on what a mezzanine loan is. How are you doing today, Marcy?
Marcy: I’m doing very well, thank you. We just thought we would like to reach out and give everyone information on what is a second mortgage, a mezzanine loan. There are a lot of different terms for it.
Jack: And we thought a good place to do it would be a park bench.
Marcy: Yes, we’re sitting outside enjoying—
Jack: Yeah, it’s more impactful. No, actually, because of the uptick in the Omicron (Covid), we decided rather than— we have masks so I don’t get in trouble by my wife or my son. Marcy has a mask, but we decided to make it outside to be a little more social distance. Anyway, a lot of people ask, and there’s a lot of confusion about what mezzanine loans are. So, we wanted to make this video, not so much as a commercial for us, a little bit of a commercial for us.
Marcy: But to educate.
Jack: Educate on what a mezzanine loan is. So, mezzanine loan is commonly, and I’m going to talk in real estate. It has a slightly different meaning for business loans and non-real estate. But a mezzanine loan in real estate is subordinate to the first mortgage, so it’s behind the first mortgage. I’m sorry, it’s subordinate. Yes, it’s subordinate to the first mortgage. Technically, it can be a subordinate to the first and second, but it’s a subordinate debt but ahead of equity. So if you picture you have a property, the first out is the first mortgage, then it would be a mezzanine, which is generally a secured mortgage on the property. Usually, there’s an inner creditor agreement, which is an agreement between the mezzanine lender and the first mortgage. So, we at Gelt Financial acts as a mezzanine lender, so we have what’s called an inner creditor agreement with the first mortgage, which we negotiate, which talks about what happens if something goes wrong and who has what rights and who can do what, and all of this stuff as well. It’s usually secured by UCCs in the LLC, so that’s generally a mezzanine. It’s all— to my knowledge, it’s pretty much always recorded again in cases of real estate, but it’s subordinate to the equity. So, on the capital stack, you have the first mortgage debt, the mezzanine, and then the equity, so that’s the order of—
Marcy: So, what’s the total equity combined that we can do, Jack?
Jack: You mean the loan to value?
Marcy: Yes, what’s the loan to value like if we take the first and then we take a second? If someone comes to us, what’s the total loan of value that we’ll do?
Jack: You know it’s a good question, and I don’t mean to be evasive, but it really all depends on the quality of the tenant and the real estate, so—
Marcy: Okay, so if it’s a long-term tenant, Triple Net or anything like that, it would be a higher loan to value?
Jack: That’s correct. So, if you have, and generally, we’re doing these on multi-tenanted businesses or credit tenant businesses. Gelt Financial isn’t doing them, for example, a fix and flip. So, give you an example. We just closed the deal 3-4 days ago. It was on 3 credit tenant restaurants. It was in RB’s. I forget the other one. Marcy knows his stuff in three different states, but they were long-term leases, very stable. So, we would go higher. We also did one, I’m going to say a month or two months ago, on like a 70,000 square foot office building in Texas. So, generally, they’re done on more secure properties, and the more secure, the higher the leverage you’ll go, and leverage is kind of an interesting question because we did Marcy the deal in Vineland, New Jersey last year. We went up to a hundred percent on that of the purchase price because we thought the value once—much higher. So, leverage is a funny thing, but self-understood mezzanine is usually higher than first mortgage debt. We’ll go 70, 75, 80, generally sometimes higher, sometimes lower, it just all depends on the situation. But it’s an excellent tool in the tool chest for a real estate investor, again, it’s not for everyone, but for a real estate investor.
Marcy: It all depends on the properties.
Jack: All depends on the property, and the payments can be structured with a lot of flexibility. So, for example—
Marcy: As all our deals are, we like to structure them all different depending on the situation.
Jack: Anyway, so give an example. The deal we did in Texas, if I remember it correctly, the payment was lower for the first six months, and then it went higher because he needed to put a tenant in to stabilize the property. So, there’s a lot of flexibility. But I think we gave them—do we give them a good idea of what a mezzanine loan is?
Marcy: I think so. I think everyone understands. I mean, when you hear the word mezzanine, it’s, and then again, it’s really a second mortgage to try to, you know, if anyone’s looking to understand what it is. But it all depends on the property, the collateral, and how much equity is in the collateral.
Jack: So now you know what a mezzanine loan is. If you have any questions, leave the questions. We monitor this YouTube and TikTok; we’ll answer them. If you want to get more information from us, like our videos and hit the bell or buzzer so you’re notified, like the channel. You can always call us at 561-221-0900 extension 103 and check us out at geltfinancial.com. And most important, stay safe and have a fantastic day. Thank you.”
Category: Education
Tag: mezzanine financing
