Mezzanine Loans and Profit Participation

Construction lenders will comfortably lend up to 75% to 80% of the total cost of a project.  If a developer lacks the equity to cover the remaining 20% to 25% of cost, the developer will frequently seek a construction mezzanine loan.  A construction mezzanine loan, or more simply "construction mezz" loan, is a mezzanine loan behind a construction loan.

If the developer is prepared to cover 15% of the cost of the project, a construction mezz lender will not usually ask for profit participation.  Profit participation is when the lender asks for 10% to 50% of the profit on the project when the property is completed and the units, often condo units, are sold off.

If the developer needs the construction mezz lender to go higher than 85 to 90% of cost, he can expect to be required to give up an equity kicker (profit participation) of 10% to 25% of the profits.  On more risky deals, he may be required to give up to 50% of the profits.

The typical mezzanine loan on a standing property is priced today around at 11% interest and one point.  The payments may be collected at 7%, with the balance accruing and deferring.  There will often be an exit fee of 1 point. 

The typical construction mezzanine loan that goes up to 90% of cost may be priced at 11% interest, one point, and a profit participation (equity kicker) of 10% to 25% of the profits.

Whereas many mezzanine loans do not require a profit participation, virtually all preferred equity investments require  the developer to give up profit participation.

You can apply to scores of mezzanine lenders on MezzanineLoans.com.