LOAN PROGRAMS
ABOUT
MEZZANINE
The term “mezzanine” is derived from the Italian word mezzanino, which is a diminutive of mezzano, meaning middle.
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In the real estate world, mezzanine has two meanings: 1) the level between the first and second floors in a building, e.g. the mezzanine level and 2) a type of loan for commercial property.
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A mezzanine loan, similar to a mezzanine level, fills the space between equity and a first mortgage.
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While a mezzanine loan is technically debt, it is often considered a form of equity investment since it takes a subordinate position to the first mortgage but ranks above equity.
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Mezzanine loans can be short-term or long-term. The cost of a mezzanine loan is usually less than equity but more expensive than a first mortgage.
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Few financial institutions provide mezzanine loans. Instead, lenders have specific mezzanine programs and pooled investment funds.
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Mezzanine loans are ideal for borrowers who cannot fund their property acquisitions solely through equity and mortgage debt.
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Mezzanine loans are very common in large transactions as part of the overall "capital stack".
WHAT IS A MEZZANINE LOAN?
10 MUST-KNOW FINANCE TERMS
1.
Amortization
The process of paying the principal and interest on a loan through regularly scheduled installments.
2.
Balloon payment
A loan that involves small payments for a certain period of time and one large payment for the remaining principal balance, due at a time specified in the contract.
3.
Basis points (bps)
1/100th of 1% (0.01%), typically stated as a number of basis points over an index rate.
4.
Loan-to-value (LTV)
The ratio between the loan amount and the value of the property. The ratio is commonly expressed to a potential borrower as the percentage of value a lender is willing to finance.
5.
Lock-out period
A period of time after loan closing during which a borrower cannot prepay the loan.
6.
Non-conforming loan
A mortgage loan that does not conform to regulatory limits such as loan amount, loan-to-value ratio, and other characteristics.
7.
Recourse
A loan for which the borrower is personally liable for payment if the borrower defaults.
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8.
PITI
Principal, interest, taxes and insurance, the four components of a mortgage payment.
9.
Prepayment penalty
A penalty sometimes charged to a borrower who makes a prepayment.
10.
Replacement reserves
Monthly deposits that a lender may require a borrower to place in an account for future capital improvements of major building systems; i.e., HVAC, parking lot, carpets, roof, etc.