Mezzanine, Preferred Equity and Bridge Financing: What You Need to Know
Conventional debt financing is what people usually think of when they seek financing for a commercial real estate loan. You go to a traditional lender, such as a private bank or government agency, and secure a mortgage after the lender performs careful vetting your financial history and an assessment of the loan’s collateral.
Conventional debt financing has limits, however. For one thing, it can take a while before traditional lenders complete the document chase. It can also stunt cash flow at a time when the business needs funds to expand. For a business with strong growth potential, or a company with a proven reputation, trading in equity interests, whether in an investment property or in the company itself, can be an expedient way of leveraging capital.
Bridge, mezzanine, preferred equity are second-tier (junior) options that combine debt and equity financing, allowing different options for securing and repaying a commercial real estate investment.
Bridge Loans (Debt Bridge Financing)
Bridge loans seek to stem a cash shortfall and are an interim solution that allows you to purchase a property while a traditional lender is still processing your company’s creditworthiness. Although they are processed in a way similar to ordinary mortgage loans, they have a different structure, with higher interest rates and a loan term of only six months on average.
Bridge loans can come from the same lender as a traditional commercial real estate loan, or they might come from a venture capital firm or, in the case of small businesses, microfinance sources.
As the name implies, mezzanine financing is second-tier, or junior, financing that sits on top of (supplements) the senior mortgage loan on your commercial property. It is a high interest hybrid of debt and equity with attractive features for both the lender and the borrower:
• The interest is tax deductible for borrowers.
• If the borrower cannot make a scheduled payment, some of the interest may be deferred.
• Lenders will receive equity in the business if the borrower defaults.
• The lender may receive warrants for purchasing an equity stake in the business.
• Lenders receive interest payments on a monthly, quarterly, or annual basis.
As they expand their capital, companies have the option to restructure mezzanine financing into one more senior level debt at a lower interest rate.
Preferred Equity Financing
In many ways, preferred equity is like mezzanine financing. Both are junior financing designed to supplement a senior debt. However, while mezzanine financing uses the property as collateral for the loan – in the case of default, the lender gains an equity stake in the property — preferred equity is an investment in the company itself.
Preferred equity provides a special, or “preferred” rate of return to the investor, one that must come before any common equity distribution can be made to the company, and the investor has the right to accelerated repayment of the loan.
Although the preferred equity investor does not have foreclosure rights in the same way that a senior lender would, they do have certain contract remedies that shifts managing control of the investment to the preferred equity investor.
Peak Finance Company, Commercial
Peak Commercial provides access to conventional debt financing, structured debt, joint venture, mezzanine, preferred equity, and bridge financing. They have access to the best terms available, whether through Wall Street investment banks, pension and opportunity funds, commercial banks, insurance companies, or private equity investors.