Mezzanine Financing for Apartment Properties
Mezzanine Financing is the middle ground between debt and equity financing.
Better Financing Starts with More Options$1.2M offered by a Bank at 6.0%$2M offered by an Agency at 5.6%$1M offered by a Credit Union at 5.1%Click Here to Get QuotesCommercial, Multifamily, and Apartment Mezzanine Financing
A lot of the time, merchant builders who are looking to maximize their IRR also need to maximize leverage, as the cost of equity is often more expensive than non-recourse debt. Sometimes, In other situations, merchant builders simply need more leverage to keep liquidity available for other opportunities. When looking to build your capital stack, your first option should be mezzanine financing and preferred equity.
Even though mezzanine debt greatly increases leverage, there are some senior lenders that don’t allow it. For example, HUD apartment loan programs never permit mezzanine loans, while agency lenders like Fannie Mae® and Freddie Mac® typically restrict mezzanine debt to approved sources that are obligated to lend under specified guidelines. CMBS lenders permit mezzanine debt in some cases, but not always. When a senior lender does agree to permit mezzanine debt, both lenders must sign an inter-creditor agreement, which governs the rules between the two parties in regards to how and when each will get paid.
2022 Sample Mezzanine Financing Loan Terms For Apartment Loans
Amount: $3 million and up
Term: Coterminous with first (typically between 5-7 years)
Interest Rates: Typically between 9% - 16% (interest only)
Fees: 3% - 6%
Maximum LTC: 85%
Advantages:
- Increases leverage and IRR
- Interest is tax-deductible
- Flexible options include equity kickers for reduced interest rates and PIK toggles for reduced interest payments
Disadvantages:
- Can be extremely expensive (up to 20% for some borrowers)
- Not allowed by all lenders
- High fees and additional legal costs