Most Large Commercial Construction Loans Now Need a Mezzanine Loan Piece

In the old days, if a developer wanted to build a $20 million office tower or mixed use project, he merely had to contribute $3 million towards the total project cost (15%).  Some bank would then make a commercial construction loan that was 85% loan-to-cost.

Modernly most large commercial construction lenders want to stay around 80% loan-to-cost.  Eighty percent?!  Does this mean that the developer has to cover 20% of the total project cost in cash ($4 million in our example above)?

No.  The way deals are getting done is that the developer contributes around 7% of the total project cost and then obtains a mezzanine loan (which resembles a second mortgage) for around 13% of the project cost.  A typical mezzanine loan on a construction project today might cost 10% and 1-2 points.  The mezzanine lender on such a highly leveraged construction deal would also typically also take between 25% to 50% of the profits ("of the up").

You can apply to scores of mezzanine lenders using C-Loans.com.