mezzanine financing in Boston MA
Mezzanine financing is a form of capital that sits between senior debt (such as a bank loan) and equity (the investor’s cash) in the real estate capital stack.
It’s often described as hybrid financing because it blends characteristics of both debt and equity:
- Like debt, it typically includes interest payments
- Like equity, it carries higher risk and higher potential returns
- It is usually subordinate to the senior lender but senior to common equity
In simple terms, mezzanine financing helps fill the gap when a senior lender won’t cover the full cost of a project—and the borrower doesn’t want (or can’t) contribute more equity.
Where Mezzanine Financing Fits in the Capital Stack
A typical commercial real estate capital stack looks like this (from lowest to highest risk):
- Senior Debt – First mortgage or bank loan
- Mezzanine Financing – Secondary, subordinated financing
- Preferred Equity – Equity with priority returns
- Common Equity – Owner or investor capital
Mezzanine lenders accept more risk than senior lenders, which is why they command higher interest rates or returns.
How Mezzanine Loans Work in Commercial Real Estate Deals
Step 1: Senior Loan Is Maximized
Most banks and institutional lenders cap loans at a certain loan-to-value (LTV) or loan-to-cost (LTC) ratio—often 60–70%.
If a project needs more capital beyond that limit, mezzanine financing can step in.
Step 2: Mezzanine Loan Fills the Capital Gap
The mezzanine loan is structured on top of the senior loan, increasing the total leverage of the deal—often up to 80–90% of total project cost.
This allows developers to:
- Reduce the amount of equity they need to invest
- Preserve ownership and control
- Improve potential returns on invested capital
Step 3: Loan Is Secured Indirectly
Unlike senior loans, mezzanine loans are not secured by the property itself. Instead, they are typically secured by:
- A pledge of ownership interests (LLC or partnership interests)
- Rights defined in an intercreditor agreement with the senior lender
This structure allows mezzanine lenders a path to control the property if the borrower defaults—without holding a direct mortgage.
Step 4: Returns Are Higher Than Senior Debt
Because mezzanine lenders take on more risk, returns are higher. These may include:
- Higher interest rates
- Interest-only payments
- Equity participation or profit-sharing components (in some structures)
Why Borrowers Use Mezzanine Financing
Financing in Boston MA
Mezzanine financing in Boston MA is especially attractive when:
- A project has strong fundamentals but limited senior loan proceeds
- A developer wants to avoid diluting ownership
- A deal needs to close quickly
- The property is stabilized or near stabilization
Common use cases include:
- Multifamily developments
- Value-add acquisitions
- Office, retail, and industrial projects
- Hospitality and mixed-use developments
Risks and Considerations
While mezzanine financing offers flexibility, it’s not right for every deal. Borrowers should carefully evaluate:
- Higher cost of capital
- Cash flow requirements
- Intercreditor agreement restrictions
- Exit strategy timing
Working with an experienced financing partner is essential to structuring mezzanine debt correctly.
How FinanceBoston Inc. Helps
At FinanceBoston Inc., we specialize in helping commercial real estate investors and developers structure smart financing solutions—including mezzanine loans—tailored to each project’s goals.
Whether you’re trying to:
- Close a capital gap
- Increase leverage
- Preserve equity
- Improve deal returns
our team can help evaluate whether mezzanine financing is the right fit.
Ready to Explore Mezzanine Financing?
If you’re planning a commercial real estate deal and need flexible capital solutions, contact FinanceBoston Inc. today to discuss mezzanine financing options that align with your strategy.
FinanceBoston, Inc.
33 Broad Street
Boston, MA 02109
617-861-2041
No comments:
Post a Comment