Commercial Real Estate Mezzanine Finance: Market Opportunities‪.‬

Mezzanine finance has become an important source of capital for commercial real estate acquisitions, development, and refinancings, as traditional first mortgage providers have become more reluctant to finance projects at loan-to-value (LTV) ratios in excess of 65%. The increased conservatism of lenders, partly in response to regulatory requirements and partly in response to commercial mortgage-backed securities (CMBS) market demands, has created a gap between what lenders will provide and what borrowers want from debt sources. Mezzanine finance has emerged to fill the gap. The result has been increased segmentation of the capital structure for specific real estate transactions. The challenge for finance providers is to price the mezzanine segment to provide compensation for the risk taken. This paper provides background on the mezzanine finance market including changes in the first mortgage market that helped push the mezzanine market into greater prominence. We identify the primary situations in which mezzanine finance can play a role and discuss the risks and implications of extending mezzanine finance. We posit that examination of a borrower's motivations for using mezzanine finance provides insight on risk for potential providers of capital.