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        <Summary>Learn About Mezzanine Loans, Preferred Equity, and How to Structure the Financing of Large Commercial Projects.</Summary>
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&lt;P&gt;Structured finance is where the big boys play.&amp;nbsp; At a recent conference I 
met a banker whose &lt;EM&gt;average&lt;/EM&gt; loan was $200 million.&amp;nbsp; His bank had 
done one deal that year for $1.3 billion.&amp;nbsp; This daily blog will teach you 
structured finance.&amp;nbsp; My name is&amp;nbsp;George Blackburne, and I will be your 
instructor.&amp;nbsp; I am an attorney and the owner of both Blackburne &amp;amp; Brown 
Mortgage&amp;nbsp;Company, a $50 million commercial hard money lender, and C-Loans, 
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href="http://www.c-loans.com/onlineapp"&gt;C-Loans.com&lt;/A&gt;.&amp;nbsp; If you have any 
topics that you would like me to cover, please write to me at &lt;A 
href="mailto:george@blackburne.com"&gt;george@blackburne.com&lt;/A&gt;&lt;/P&gt;</Description>
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         <Name>Understanding Mezzanine Loans</Name>
         <Summary>Mezzanine Loans Are a Way to Achieve Extraordinary Leverage on Huge Commercial Projects</Summary>
         <Description>&lt;p style="MARGIN-TOP: 0px" align="left"&gt;&lt;font face="Arial, Helvetica, sans-serif" size="2"&gt;Mezzanine loans are similar to second mortgages, except a mezzanine loan is secured by the stock of the company that owns the property, as opposed to the real estate.&amp;nbsp;&lt;/font&gt;&lt;/p&gt;&lt;p align="left"&gt;&lt;font face="Arial, Helvetica, sans-serif" size="2"&gt;If the company (usually a LLC) fails to make the payments, the mezzanine lender can foreclose on the stock in a matter of a few weeks, as opposed to the 18 months it often takes to foreclose a mortgage in many states.&amp;nbsp; If you own the company that owns the property, you control the property.&lt;/font&gt;&lt;/p&gt;&lt;p align="left"&gt;&lt;font face="Arial, Helvetica, sans-serif" size="2"&gt;Our own hard money company once had to foreclose a mortgage in New York, and it took almost two years.&amp;nbsp; Yikes!&amp;nbsp; In contrast, a mezzanine loan is secured by the stock of a company, which is &lt;em&gt;personal property&lt;/em&gt; and can be seized much faster.&lt;/font&gt;&lt;/p&gt;&lt;p align="left"&gt;&lt;font face="Arial, Helvetica, sans-serif" size="2"&gt;Mezzanine loans are also fairly big.&amp;nbsp; It is hard too find a mezzanine lender who will slug through all of the required paperwork for a loan of less than $2 million.&amp;nbsp; It is occasionally possible to obtain mezzanine loans as small as $1 million.&lt;/font&gt;&lt;/p&gt;&lt;p align="left"&gt;&lt;font face="Arial, Helvetica, sans-serif" size="2"&gt;In addition, mezzanine lenders typically want big projects.&amp;nbsp; If the property you are trying to finance is not worth close to $10 million, you may have a hard time attracting the interest of any mezzanine lenders.&lt;/font&gt;&lt;/p&gt;&lt;p align="left"&gt;&lt;font face="Arial, Helvetica, sans-serif" size="2"&gt;There are three typical uses for a mezzanine loan.&amp;nbsp; Suppose the owner of a $10 million shopping center has a $5 million first mortgage from a conduit. &amp;nbsp; The owner wants to pull out some equity, but he cannot simply refinance the shopping center because the first mortgage has either a &lt;em&gt;lock-out clause&lt;/em&gt; or a huge defeasance prepayment penalty.&amp;nbsp; In this instance, he could probably obtain a $2.5 million mezzanine loan to free up some cash.&lt;/font&gt;&lt;/p&gt;&lt;p align="left"&gt;&lt;font face="Arial, Helvetica, sans-serif" size="2"&gt;Suppose an experienced office building investor wanted to buy a partially-vacant office building in a fine location.&amp;nbsp; Once again, assume that the purchase price is $10 million (when the office building is still partially-vacant) and that the conduit first mortgage is $5 million.&amp;nbsp; &lt;/font&gt;&lt;/p&gt;&lt;p align="left"&gt;&lt;font face="Arial, Helvetica, sans-serif" size="2"&gt;This may surprise you, but the right mezzanine lender might be willing to lend a whopping $4 million!&amp;nbsp; But isn't that 90% loan-to-value?&amp;nbsp; Yes, but when the vacant space is rented - remember, our buyer is a pro - the property will increase to $12 million in value.&amp;nbsp; Suddenly the mezzanine lender is back to 75% loan-to-value and his rationale is obvious.&amp;nbsp; This kind of deal is called a &lt;em&gt;value-added&lt;/em&gt; deal.&lt;/font&gt;&lt;/p&gt;&lt;p align="left"&gt;&lt;font face="Arial, Helvetica, sans-serif" size="2"&gt;The third and final use of mezzanine loans is for new construction.&amp;nbsp; Suppose a developer wanted to build a 400 room hotel across the street from Disneyland.&amp;nbsp; Hotels today are out of favor, and a commercial construction lender might only be willing to make a loan of 60% loan-to-cost. &amp;nbsp; If the total cost was $20 million, the developer would ordinarily have to come up with 40% of $20 million or $8 million.&amp;nbsp; That's a lot of dough.&lt;/font&gt;&lt;/p&gt;&lt;p align="left"&gt;&lt;font face="Arial, Helvetica, sans-serif" size="2"&gt;A $3 million mezzanine loan solves the developer's problem.&amp;nbsp; The commercial construction lender would advance $12 million, the mezzanine lender would make a $3 million mezzanine loan, and the developer would &amp;quot;only&amp;quot; have to come up with $5 million.&lt;/font&gt;&lt;/p&gt;&lt;p style="MARGIN-BOTTOM: 0px" align="left"&gt;&lt;font face="Arial, Helvetica, sans-serif" size="2"&gt;There are about 150 mezzanine lenders active in the country today, and you can apply to most of them by just clicking &lt;a href="http://www.c-loans.com/onlineapp"&gt;&lt;u&gt;&lt;font color="#0000ff"&gt;here&lt;/font&gt;&lt;/u&gt;&lt;/a&gt;.&lt;/font&gt;&lt;/p&gt;</Description>
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                   <Title>C-Loans Commercial Mortgage Lender Databank</Title>

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         <Name>The Pricing of Mezzanine Loans</Name>
         <Summary>Mezzanine Loans Are More Expensive Than Mortgage Debt But They Are Much Cheaper Than Equity</Summary>
         <Description>&lt;p&gt;There are two main types of&amp;nbsp;mezzanine loans - mezzanine loans on standing property and mezzanine loans on construction projects.&amp;nbsp; We shall use the terms &lt;strong&gt;&lt;em&gt;standing mezz&lt;/em&gt;&lt;/strong&gt; and &lt;strong&gt;&lt;em&gt;construction mezz&lt;/em&gt;&lt;/strong&gt;.&lt;/p&gt;&lt;p&gt;Let's suppose an investor bought an office building 8 years ago for $10 million, and the building is now worth $18 million.&amp;nbsp; He originally obtained a $7.5 million permanent loan from a CMBS lender that is&amp;nbsp;paid down to $7 million.&amp;nbsp; Therefore&amp;nbsp;he owes just $7 million on an $18 million property, and he wants to pull out some cash to buy another building.&lt;/p&gt;&lt;p&gt;CMBS lenders do not permit second mortgages, and their prepayment penalties are ghastly.&amp;nbsp; Therefore the investor will need to get a&amp;nbsp;mezzanine loan to pull out his equity.&amp;nbsp; Today mezzanine lenders are very agressive, so he should&amp;nbsp;be able to easily obtain a standing mezz loan of $7.4 million (80% LTV).&lt;/p&gt;&lt;p&gt;What would this loan cost him?&amp;nbsp; He has two options.&amp;nbsp; One option would be to get a floating rate, standing mezz loan.&amp;nbsp; The other option would be a fixed rate loan.&lt;/p&gt;&lt;p&gt;A floating rate deal would probably cost him one-month LIBOR plus&amp;nbsp;400 to 500 basis points (bps).&amp;nbsp; Lenders sometimes use the expression, &amp;quot;400 to 500 bips over&amp;quot;.&amp;nbsp; In structured finance, one-month LIBOR is so common that lenders don't even have to make reference to the name of the index.&amp;nbsp; Today one-month LIBOR is around 4.4%, so the cost of his loan would be 8.4% to 9.4%.&lt;/p&gt;&lt;p&gt;The typical loan fee would be one point, plus maybe an exit fee of one point.&lt;/p&gt;&lt;p&gt;The term of the standing mezz loan would be &lt;strong&gt;&lt;em&gt;coterminous&lt;/em&gt;&lt;/strong&gt; with the first mortgage; i.e., they would mature on the same date.&amp;nbsp; Since the original CMBS loan had a term of ten years, and since the CMBS loan was originated eight years ago, the standing mezz loan would have a term of two years.&lt;/p&gt;&lt;p&gt;Standing mezz loans typically have a term of one to three years, but extention options are often available.&amp;nbsp; Some mezzanine lenders are even willing to go out five to ten years.&amp;nbsp;&lt;/p&gt;&lt;p&gt;In our earlier example, the total&amp;nbsp;&lt;strong&gt;&lt;em&gt;debt stack&lt;/em&gt;&lt;/strong&gt; on the office building was 80% loan-to-value.&amp;nbsp; The debt stack includes all of the mortgages, mezzanine loans, and preferred equity investments directly or indirectly secured by the property.&amp;nbsp; Did you know on some very large commercial projects that there will be a first mortgage piece, a senior mezz piece, a junior mezz piece, and a preferred equity piece?&amp;nbsp; That pie is sliced and diced every which way from Sunday.&lt;/p&gt;&lt;p&gt;If a new buyer wanted to buy the office building and assume the $7 million first mortgage loan, he might want a mezzanine loan up to 90% of the purchase price.&amp;nbsp; This way he would only have to put 10% down.&lt;/p&gt;&lt;p&gt;A mezzanine loan of 90% loan-to-value is more risky than one that is 80% LTV.&amp;nbsp; Mezzanine lenders will often use the term loan-to-cost here because appraisals are mistrusted&amp;nbsp;and the building is actually costing the buyer $18 million. &amp;nbsp; A mezzanine loan of 90% LTC might cost 500 to 700 bips over.&amp;nbsp; In this case the cost to the buyer would be 9.4% to 11.4%.&lt;/p&gt;&lt;p&gt;Fixed rate standing mezz deals are typically priced at 450 to 550 basis points&amp;nbsp;over ten-year Treasuries.&amp;nbsp; Ten year Treasuries today are around 4.5%, so fixed rate mezzanine loans up to 85% LTV might cost the borrower 9% to 10% interest.&amp;nbsp; If a buyer needed 90% LTC financing, a fixed rate mezzanine loan might cost 550 to 750 bips over 10-year Treasuries, or 10% to 12% interest.&lt;/p&gt;&lt;p&gt;Construction mezz is typically priced on a floating rate basis with some sort of profit participation.&amp;nbsp; The developer almost always needs at least 90% LTC financing.&amp;nbsp; Therefoore&amp;nbsp;a typical deal might be priced at&amp;nbsp;600 to 700 bips over with a 10% to 25% participation.&amp;nbsp; Since one-month LIBOR is 4.4%, the interest rate might be around 10.4% to 11.4%, plus the profit participation.&lt;/p&gt;&lt;p&gt;Sometimes mezzanine lenders may even go up to 93% to 95% of cost, but these loans are so risky that they are almost joint ventures.&amp;nbsp; As a result, they are very costly.&amp;nbsp; The developer will pay at least 11% to 13% interest plus up to 50% of the profits.&lt;/p&gt;&lt;p&gt;Equity investments from partners and merchant bankers usually cost in the range 18% to 30% annually; therefore in most cases mezzanine debt is much cheaper than equity.&lt;/p&gt;&lt;p&gt;You can apply to scores of mezzanine lenders on C-Loans.com.&lt;/p&gt;</Description>
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