Debt
Mezzanine financing
Subordinate commercial real estate debt that sits between the senior loan and the equity, secured by a pledge of the ownership interests.
A mezzanine loan is made to the company that owns the property-owning entity. It is secured by a pledge of that ownership interest rather than by a mortgage on the property, and its rights against the senior lender are set by an intercreditor agreement.
Mezzanine debt raises total leverage above what a senior lender will provide, at a higher cost than senior debt. It is used in construction, acquisitions and recapitalizations, wherever the senior loan leaves a gap the sponsor does not want to fill with more equity.
We arrange mezzanine debt alongside the senior loan, so the two lenders’ terms and the intercreditor agreement are negotiated together rather than one after the other.
Where the senior lender does not permit mezzanine debt, preferred equity is sometimes used in a similar place in the capital stack, although it is equity rather than a loan and is commonly subject to the senior lender's own requirements. Preferred equity is a security, and is advised on by our affiliate, Wraith Advisory. Equity through Wraith Advisory
Equity is advised on by Wraith Advisory. Wraith Real Estate is not a broker-dealer and does not offer or sell securities.
Securities are offered through Finalis Securities LLC, Member FINRA / SIPC. Wraith Capital Advisory is not a registered broker-dealer, and Finalis Securities LLC and Wraith Capital Advisory are separate, unaffiliated entities.
Used for
- Construction, behind a senior construction loan
- Acquisitions, behind a bridge or permanent loan
- Recapitalizations and refinancing gaps
Lenders
Debt funds, insurance companies and other private lenders that invest in subordinate real estate debt.
How mezzanine financing works
Because a mezzanine lender's collateral is the ownership interest rather than the property, a default is typically enforced through a UCC foreclosure on that interest, which can move faster than a mortgage foreclosure. The intercreditor agreement sets out what the mezzanine lender may do, including rights to cure defaults on the senior loan and, in many agreements, an option to buy the senior loan, usually after a senior loan default.
Mezzanine debt typically costs more than senior debt because it is subordinate: it is paid from cash flow left after senior debt service, and in a sale, refinancing or default the senior loan is paid first, so the mezzanine lender bears losses before the senior lender does. Part of the interest is sometimes paid in kind, added to the loan balance rather than paid currently. Not every senior lender permits a mezzanine loan behind it, so the senior lender's terms are reviewed first.
What mezzanine lenders look at
- Combined leverage across the senior and mezzanine loans
- The senior loan’s terms and the intercreditor agreement
- Cash flow coverage after senior debt service
- The sponsor’s remaining equity in the deal
How a financing runs
- 01
The loan request
We build the request with the sponsor: the business plan, sources and uses, the budget or operating history, the pro forma and the sponsor’s financial information.
- 02
Lender selection
Lenders are chosen with the sponsor by property type, market, loan size and structure before anyone is contacted.
- 03
Quotes
Lenders receive the request under confidentiality and return indicative terms. We lay the quotes side by side on leverage, pricing, recourse, prepayment, reserves and covenants.
- 04
Term sheet
The sponsor selects a lender, and we negotiate the term sheet and the application.
- 05
Closing
We coordinate the appraisal and third-party reports, answer the lender’s underwriting questions and work with counsel on the loan documents through closing.
Loan terms depend on the property, the sponsor, the lender and market conditions, and a financing may not close.
Request financing
Send us the property, the business plan and the capital you need. We will tell you how we would approach it.