Commercial Real Estate Financing: The Benefits of Mezzanine Loans

Mezzanine loans are a unique type of commercial real estate financing. The practice is difficult to define in layman's terms. This article will attempt to clarify what a mezzanine loan is, why investors like mezzanine loans and how borrowers could benefit from this type of lending.

Online searches yield a variety of esoteric definitions for Mezzanine loans. The arrangement involves a borrower paying a fixed interest rate and on additional percentage of future income to a lender. Mezzanine loans blur the lines between debt and equity investment making them somewhat difficult to understand.

Often such lenders get a share of ownership in a borrowers company or a fixed amount of the company’s future profits. In a typical mortgage arrangement a corporation pays its principal lender, before paying its investors and shareholders. With a mezzanine loan in the mix the borrower pays the principal mortgage, the mezzanine lender and then the shareholders. This type of lending bridges the gap between a company’s existing loans and its outstanding equity. This helps companies who are unable to take out additional loans or who do not have sufficient collateral. Mezzanine loans are particularly beneficial for companies with a strong cash flow, or established businesses that need a large amount of financing in order to expand. However this type of lending considered risky. Interest rates on mezzanine loans can range from 12-20 percent.

Mezzanine lenders get very specific and attractive benefits from these loans. Mezzanine lenders often get a share of ownership or equity in the borrowers business. Should the borrowers company succeed, these shares can offer returns to a mezzanine lender far above the initial loan amount. The high interest charged on mezzanine loans offers higher returns to lenders far above traditional loans. Mezzanine lending offers returns similar to equity investment, however the returns are often steadier in comparison. Mezzanine borrowers are usually contractually obligated to make interest payments. Equity investors often don't get similar guarantees.

Considering the expense why would a borrower use a mezzanine loan as a method of commercial real estate financing?

Mezzanine loans give borrowers the opportunity to borrow a far larger amount than they would be able to through a traditional loan. Borrowers could potentially leverage 3 to 4 times their current cash flow with a mezzanine loan. Another advantage for borrowers is that interest payments on outstanding loans are tax deductible. The higher interest rates involved with this type of lending means a higher tax deduction for borrowers. Above all mezzanine loans are far more flexible than traditional loans. These lenders often work with borrowers based on their current cash flow, with some even giving borrowers a “payable in kind,” interest option. This option gives borrowers who are unable to keep up with current interest payments the option to roll these payments into the principal of the loan and defer interest payments to a later date.

Above all mezzanine loans are a better type of commercial real estate financing when compared with equity lending.

Borrowing against equity is notoriously expensive, usually far more expensive than a Mezzanine loan. Mezzanine lenders often own shares of a borrowers company, but typically act as passive partners. Borrowing against a company’s equity usually dilutes a business owner’s ability to retain direct control over their operations. Mezzanine lending gives borrowers the opportunity to expand without directly losing ownership in their business. Businesses prohibited from taking out second mortgages will usually turn to mezzanine lending, as it usually preferable to selling shares of ownership or seeking out new investors.

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

Technorati Tags: commercial loans,commercial lending,commercial mortgage

Commercial Real Estate Financing: Is There Anyway To Speed Up The Process?

It is no secret that commercial real estate financing takes time, sometimes a lot of time. You may feel helpless, as a borrower, after you sign on the dotted line of your application and find yourself just sitting around waiting, but there are some things that can be done beforehand to make the process go as quickly as possible.

Getting to the point of signing on the dotted line with commercial real estate financing is a flurry of activity. Negotiating, contacting lenders, getting the paperwork in line and making sure that you are staying on top of the terminology are all things that take a great deal of time. But once you sign, the process (at least from the point of view of the borrower) comes to a halt and you must just sit and wait. But if you properly prepare, you might end up having to wait less than other borrowers.

One thing that you can do to make sure that your commercial real estate financing application is not ignored is to quickly and thoroughly complete the forms that the lender gives you. It might seem like common sense, but this is a mistake that many borrowers make and will help you to stand out. What lender is going to want to work quickly for you if you do not do the same for them? By showing the lender, through your actions, that you are willing to work just as hard as they are, you are going to increase your chances of them working quickly on your loan application. This will greatly speed up the process for you.

It is absolutely critical that all of the forms that your lender will give to you be filled out as completely as you can possibly do them. Many commercial real estate financing forms ask for a tremendous amount of detail. Do not ignore this. Even if it feels like you are repeating what is already in your documentation. Having this done before the third-party appraisal of the property comes in will keep your loan at the top of the que for the lender and underwriter, but if you wait, and the appraisal comes in without your paperwork, you will quickly find your loan at the bottom of the priority list.

Another tactic that will help leave a good impression and make a lender want to work harder for your loan is to simply follow their rules. Again, it might seem like common sense, but many borrowers will try to argue about the different processes that lenders use. There is no point in doing so and the only outcome is going to be making the lender frustrated with you and not wanting to work as hard.

Is there anything that I can do while my commercial real estate financing application is being processed?

There is actually very little that you can do, outside of waiting. If you have properly prepared and have been responsive to your lender quickly and with attention to detail, you will likely get immediate attention. The one thing that you can do is to continue to be responsive. If your lender asks for further documentation or for other information about the property, get that information to them quickly. The more you drag your feet, the more your lender is likely to move on to another project. The key to commercial real estate financing is to be responsive and be thorough.

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

Technorati Tags: commercial loans,commercial lending,commercial mortgage

How To Successfully Prepare For Commercial Real Estate Financing

Finding the right loan is not just about shopping around or crossing your fingers that everything will work out. If you are to successfully obtain commercial real estate financing, you must prepare your paperwork in a professional, organized manner to show potential lenders that you not only take this loan seriously, but also that you respect them.

One major mistake that so many potential borrowers make is not professionally preparing their paperwork for the loan application process. Waiting until the last minute or throwing the documents together in an unorganized manner is a surefire way to undermine your chances of obtaining commercial real estate financing.

So how do you properly prepare you documents for examination? The first thing to do is to approach this with an attitude of absolute professionalism. Approach it as if you were making a huge sales to pitch to a business partner or potential client. Because that is basically exactly what you are doing. If all goes well, your lender will be wrapped up in your business for millions of dollars. That is most definitely deserving of a professional approach.

As you put together your paperwork for your commercial real estate financing, keep in mind that you are trying to convince lenders to invest in you and your property. So think like they would think and answer the questions that you would want to know ahead of time. Give them every reason to jump at the chance to loan you the money for your commercial property. And prepare your paperwork accordingly so that they have no choice but to jump at the opportunity that you are putting before them. It should visually convey that you take pride in your work and that you will treat this loan with equal professionalism.

What exactly should you include in your documents? For starters, include any piece of information about the commercial property that you can think of. This should include photos and some sort of executive summary about breaking down how the loan will be applied. Also include any income statements that you can expect from the property. You should also include information about you, the borrower. Personal finances, other owned properties and taxes should definitely be included. It also might be a good idea to include some sort of resume or equivalent document so that the lender can get an understand of who they will be going into business with.

What happens after with commercial real estate financing after I have talked to a lender over the phone and submitted my paperwork?

Other than sit and wait, there is not a whole lot that you can do to affect their decision, at this point. Once the lender has decided that they would like to work with you and provide commercial real estate financing, make sure that they provide you with an offer in writing. Receiving an offer over the phone is meaningless. It should come in the form of a letter of interest. Once you have that in hand, you can begin to move forward.

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

Technorati Tags: commercial loans,commercial lending,commercial mortgage