Wednesday, December 19, 2007

More on mezzanine loans

I have been writing a bit lately about a trend I am seeing toward more and more mezzanine debt being put on properties as a gap between the LTV required by a bank and the equity a buyer brings to the table.

The Wall Street Journal sees the trend too, as evidence by a story today. Novices may ask: what is so attractive about mezz loans? Think of it like a second mortgage. For the buyer that does not have the larger amounts of cash to do a deal in this market, it means the ability the lever yourself into a deal you could not otherwise do while still being able to get high returns on the back end. If you are the lender, it means getting higher rates of return than a first lender on the mezz loan, plus the ability to wipe out the buyer and take over the property dirt cheap (insert groan here) if the buyer defaults on the mezz loan. That is why you are seeing seasoned, big-name investors doing mezz deals. If the buyer performs you it a double; if it fails you could hit a home run.

(Update: But as Doug Cornelius rightly points out in the comments and here in his excellent commentary, mezz lending is not for the faint of heart, nor is it, as the article (and perhaps my post) might surmise, a guaranteed win. Negotiating with the lender and good legal documentation are also critical.)


Doug Cornelius said...

David -

I think WSJ oversimplified the mezzanine loan relationship.

Mezzanine loan sprouted up in the mid-nineties when banks cut back on the debt service coverage ratios, leaving borrower short of capital.

This current feeding frenzy over mezzanine loans was brokers trying to deliver the full capital stack to buyers. They would couple the securitized mortgage with a mezzanine loan. Then dump the mezzanine loan into a CDO.

Those treading into mezzanine loans simply to get a better return need to realize there is much more risk and much work that this article lets on.

You can read my posts on mezzanine loans:

David Stejkowski said...


Great points you are making. It has been ages since I have done any significant mezz loan work because that market largely dried up (at least in my world) when lenders got more aggressive a few years ago.

I would agree 100% (and have updated the post accordingly) that it is not a "no risk" deal; if it was we'd all be doing it. But for the risk-takers it can be an interesting and potentially profitable strategy -- almost like betting the don't pass line at craps. The article does perhaps make it seem too good to be true.

Darvin said...

A person with credit problems is not offered any financial assistance due to the risk factors.
However taking these problems in to account, lenders are now offering no credit check loans.Any borrower with credit problems such as CCJs, IVA, arrears, defaults etc can apply for these type.
No Credit Check Loans allow bad credit borrowers to enjoy financial freedom, by offering finances at the best terms and conditions.

George said...

Need Payday Loans No Faxing! Visit Instant Payday Loans Online and apply for no faxing payday loans, no fax payday loans, No Fax Loans,No Faxing Loans,No Fax Cash Loans,cheap payday loans, cash advance loans for uk residents.

Dyna said...

Apply for cash loans, same day cash, same day cash advances, instant cash loans today, cash advance payday loans and fast cash loans. Apply online easily and get your cash needs fulfilled.

Charly said...

Urgent cash can be obtained for emergency needs. They are short term unsecured small loans which are approved fast. It is easy to avail them.

Charly said...

Payday cash loans are short term loans made available instantly. With the help of these loans, you can easily take care of any emergency expenses.

jerry said...

Cash loans are short term loans. These loans comes in handy in times of financial crisis. Borrowers with good credit as well as bad credit cvan sourc e these loans. To avail these loans instantly, you can prefer to apply online.

jorge said...

If you are seeking for instant cash to supervise some urgent payments, then consider the No fax payday loans . The cash offered without any demand of collateral and for a short duration. Interest rates are reasonable and can be easily afforded.

jessica said...

Cheap emergency cash loans are unsecured loans. These loans are best used at a time of unexpected cash deficit. You can apply for the loan online and offline, processing online though is preferred.

George said...

If you need payday loans instantly then Instant-Payday-Loans-Online may be the right answer. Instant-Payday-Loans-Online is specialized in providing perfect finance solutions for times when you need a little extra cash for unexpected bills.

Payday Loan Immediately said...

Instead of spending money on this fraud, why don’t the school districts teach the black children how to speak proper english.

This would advance their self-esteem and level the playing field more than anything.

Muhammad Younis said...

Nice website and great article on loans. what a change for the better. Keep up the great work. I check it regularly and I really like your new format.

With Best Regards.

jacob said...

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


Ryann said...

With these loans you can sort out the short term expenses like pay electricity bills, medical expenses, credit card bills, car repair costs, bounced cheque fee and other similar expenses. for more information about Small Cash Loans


Ryann said...

The situation gets grimmer if the jobless individual is left to fend for himself. for more information about Loans for Unemployed