Understanding Mezzanine Financing For New Investors
If you’re new to investing, the new vocabulary and range of options can make it an intimidating game to play. You may already know what markets you’re most interested in, but you might still be figuring that out, too. One of the hottest new investment trends to take into consideration is mezzanine financing. This form of investment appeals most to real estate specialists who take advantage of the short falls which have become so common in commercial realty. So how exactly does one leverage this for profit and get started on the path of investing.
Mezzanine financing is designed to fill the financial gap between funds provided by a joint venture and financing from traditional sources. In real estate, for example, you may seek to invest in a property, but can only procure 80 percent of its price through traditional financing and joint venture. A mezzanine loan can bridge the difference and make your investment a possibility. This benefits borrowers and enables them to continue their plans, but lenders receive considerable profits from such a deal, too. How is collateral collected in agreements such as these?
This depends on the specifics of how the deal is structured. In cases where a second deed of trust is implemented, a lender is able to foreclose on the property in question should the borrower default on their payments. This is the preferred arrangement for lenders because of the security it provides. Other options, however, include an assignment of partnership interest or a cash flow note. The former is the most common and allows the lender to claim the ownership interest of the borrower and take control of the property’s equity. The latter simply signs over the cash flow from the property to the lender, which is typically accompanied by proceeds from the sale.
Each of these options presents a different opportunity for investors to take advantage of mezzanine financing and start building an investment portfolio. Though it may seem intimidating to take on such agreements and endeavors, the profits that can result will be well worth the effort. It’s essential, however, to devote time and effort into research before pursuing any path of action. When you’re ready to make the big jump and put in an offer on the investment property you are interested in, keep these basics in mind. Whether you select a mezzanine agreement for funding or another form of loan, you can bet your knowledge will be your best resource in negotiating the terms.