Commercial Loans & Mortgage News - February 12, 2002
Mezzanine Financing Revisited
The subject of mezzanine ("mez") financing is quickly heating up and becoming more and more relevant given the current economic concerns in the marketplace. Traditional lenders are less willing to provide aggressive leverage on commercial real estate assets 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 lenders exercise more caution in their underwriting - in other words - real estate investors and 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 lenders prohibit developers from adding secondary financing to the property, and in this scenario the mez lender must work with the senior 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 within the capital markets, and has been successful in building relationships with reliable mezzanine sources in order to meet the needs of its clients.
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Chief Executive Officer Peter Slaugh founded Steelhead in 1999. In the relatively short period since its inception, Slaugh has built Steelhead into a leading resource for debt and equity placement nationwide. Slaugh is primarily engaged in growing the company and its lender relationships, as well as working on financings.
San Francisco Offices
With an extensive lender network, Steelhead Capital has built its reputation on structuring commercial loans requiring both debt and equity placement. Fluctuations in the capital markets present significant challenges for investors and we are pleased to provide financing as well as guide and advise clients through the process. Whether you are looking for apartment financing, commercial financing, mezzanine financing, or creative "out of the box" real estate loan alternatives, we can help.
For apartment loans below $2 million, we have a small apartment loan program with extremely competitive rates. For apartment loans and commercial mortgage loans above $2 million, we provide direct access to the country's most aggressive lenders. Make Steelhead Capital a part of your commercial real estate financing success. We look forward to hearing from you soon.
Please click here for your confidential and complimentary loan review. Are there more questions that you'd like answered? Contact us online, or call our executive team directly in our new San Francisco office at 888-951-6600.
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