February 12, 2002

Commercial Mortgages:
Mez Revisited

The subject of mezzanine ("mez") financing is quickly heating up and becoming more and more relevant given the current economic concerns regarding commercial mortgages and the marketplace. Traditional commercial mortgage lenders are less willing to provide aggressive leverage on commercial real estate assets and commercial mortgages than they have been in the recent past. It comes down to the basic model of a real estate transaction which is comprised of debt and equity. The gap between these two components widens as commercial mortgage lenders exercise more caution in their underwriting - in other words - real estate investors and commercial mortgage lenders don't share the same perception of risk. As the gap widens, the need for mezzanine financing increases greatly.

There are generally three different uses for mezzanine financing:

• To unlock trapped equity to improve the property or purchase a new asset
  
  
• To bridge the gap between available debt and equity required for an acquisition
  
  
• To payoff construction financing until permanent debt can be placed or the property is sold

The cost of mezzanine financing is typically viewed as expensive debt, but cheap equity. Steelhead Capital is seeing mezzanine financing priced between 12% and 20% with a variety of flexible structures available, depending on the property's cash flow strength and the developer's needs. While the interest rates may seem high, the low interest rates we're seeing on first liens offset the higher cost of mez debt - thus providing a more palatable "blended" cost of capital.

Most senior commercial mortgage lenders prohibit developers from adding secondary financing to the property, and in this scenario the mez lender must work with the senior commercial mortgage lender to form an "intercreditor" agreement. Generally, this agreement gives the mez lender the ability to step in and act as the borrower in the case of default. This is no minor hurdle to overcome and the credibility and experience of the mez lender, as well as the transaction fundamentals, come under close scrutiny; however, given the current capital market environment - this structure will become more prevalent in the foreseeable future.

Steelhead Capital recognizes the shifting trends in regards to commercial mortgages and capital markets We have been successful in building relationships with reliable mezzanine sources in order to meet the needs of our clients.

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With an extensive lender and commercial mortgages network, Steelhead Capital has built its reputation on structuring commercial mortgages and commercial real estate loans requiring both debt and equity placement. Fluctuations in the capital commercial mortgages present significant challenges for investors and we are pleased to provide financing, as well as, guide and advise its clients through the process of obtaining commercial mortgages. Whether you are looking for apartment financing, commercial financing, commercial mortgages, or creative "out of the box" real estate loan alternatives, we can help.

Our success is measured by our clients' success, and our mission is to be your source for the most appropriate - and advantageous - commercial mortgage solution that helps you achieve your goals. Make Steelhead Capital a part of your commercial mortgage and real estate financing success. We look forward to hearing from you soon regarding our commercial mortgages and real estate financing services.

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