Mezzanine Construction Financing
“Mezzanine Construction Financing May Be Required For Larger Scale Commercial Projects That Don’t Enough Equity To Secure The Required Financing”
For low rise or high residential projects, retail developments, industrial developments, or revenue earning real estate that has long term profit potential, financing packages can be hard to put together.
Regardless of the size of the project, the typical required equity portion that a construction lender will require in the deal is 25%. As the project size increases, so does the amount of the equity requirement in terms of dollars.
If the project is sound and can withstand the risk associated with a higher degree of leverage, the builder or owner may need to utilize mezzanine construction financing to make the numbers work.
Depending on the project, Mezzanine financing can be as high as 75% of the equity component of the development. While the funds are being used to cover off the equity requirement, the capital is still registered as a mortgage behind the senior lender position and any other mortgage loans on title. These types of transactions can take on a number of different forms and can be quite complex. But if the project is large enough as well as the potential profit, there is a good chance that different mezz funds will take a good look at the deal.
There are some other requirements to remember as well for mezzanine financing. First, the mezz fund requirement would have to be at least $2 million for most funding sources. Second, the cost of capital would likely need to be between 20% and 30%. Third, if the project was a condo development, there would need to be pre-sales of between 20% and 50%, depending on the project. Fourth, the geography will be critical to the project’s eligibility for mezz financing. This is likely only going to be available in larger centers, or high end resort locations where the real estate market is very active.
Mezzanine loans can be arranged for period of 1 to 5 years, again depending on the nature of the project. There will need to be a clear exit strategy in place as well to secure this type of funding.
If you have a large commercial project that requires additional equity to make the capital structure work, give me a call so that we can discuss your project and capital requirements in more detail.
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About the Author Joe Walsh
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel