Mezzanine Loans
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Next, you have to have the collateral. Most (but not all, by any
measure) mezzanine/bridge lenders realize their financing has to be subordinated
(must be junior) to the construction loan; this eliminates the main collateral
the lender would otherwise encumber. You must be prepared to offer
collateral independent of the project mortgage and this collateral must be equal
to 150% to as much as 350% of the origination amount of the financing. If
you don't have it, then the lender puts your application fee in their pocket and
moves on to the next victim.
Perhaps it may be wiser to give consideration to a fractional real estate
ownership syndication plan approach to providing additional financing for your
proposed project?
Once all the required due diligence exhibits are
created, reviewed and approved an actual syndication runs for 90 days. If
you have done your homework and are offering what the market perceives as a real
opportunity, then you may be able to obviate the more costly financing
alternative (mezzanine/bridge loans) and control your own destiny.
You must
also demonstrate multiple opportunities for retiring this
financing. The most obvious route is a pending refinancing of the
construction phase debt into a permanent mortgage. This means you have to
make sure your construction lender (who is quite often the perm lender) know
that you want to finance an amount in excess of their construction loan.
This may require additional interim loan exposure, but without having a loan
commitment that retires the financing, you will (once again) have paid a hefty
application fee for nothing of value.
A good question and one that the Rainmaker
Marketing Corporation consultants field quite
frequently. Basically, a mezzanine loan is used as near-term (three (3)
years or less) funding measure for developers seeking to create additional
financial investment leverage by using the mezzanine to replace the capital
contributions the developer would otherwise make to the transaction. Let's
be very clear on this point - mezzanine loans replace the capital you have in
your hands and not capital that you do not have in your hands. If you are
seeking to acquire additional equity investment then you have the following
choices to consider:
-
Shelve the project until you have enough
funds to cover all contribution requirements your project may have regarding
at-risk equity and capital contributions; or
-
Undertake a
private
placement offering of equity securities to raise the funds necessary and
thereby accept a potentially massive dilution of your ownership interests in
the project; or
-
Undertake a private placement offering of
equity securities that are based upon some investment incentive entitlement
the project may qualify for at the local, state and/or federal level.
The third choice is the most common one the developer usually seeks to
implement. The entitlements review should have been undertaken in the
course of the market
feasibility study's completion. If this is not the case, then consider
having Rainmaker complete the investment incentive entitlements review without
delay. It costs far less than a mezzanine loan application fee and can
offer you the opportunity to utilize these incentives to provide your project
with the equity financing (gap financing) you really need. Rainmaker
offers a comprehensive capital
funding plan approach that will help you maximize your opportunity for
funding success.
