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What Is a Mezzanine Loan and Do You Need One for Real Estate?

What Is a Mezzanine Loan and Do You Need One for Real Estate

Did you know that the mezzanine loan has one of the highest rates of return when compared to any other type of loan? Mezzanine loans are a valuable type of real estate loan for real estate investors.

If you’re new to real estate then you might be wondering “what is a mezzanine loan?” Knowing what a mezzanine loan is and how it will benefit you as a real estate investor is valuable to know if you want to grow your wealth and find the highest levels of success possible.

Luckily, you’ve come to the right place to learn more about the mezzanine loan definition and how it is a great real estate loan for your real estate investing needs. Continue reading this article to learn more.

What Is a Mezzanine Loan?

Mezzanine loans are a type of loan for real estate purposes that manages to combine debt and equity. The lender of the mezzanine loan provides the money to the real estate investor as well as equity interest for the loan. This type of loan is best used when a real estate investor needs money for a significant investment.

While you might need additional money in order to make the investment, investors might not be keen to provide you with the funding. Traditional lenders will be likely to loan you some of the money you’ll need but not all of it. This leaves you with a gap of money that you’ll want to close.

This is where the mezzanine loan comes into the picture. A mezzanine loan is a creative solution to a tricky financing situation. One thing to be aware of when it comes to using mezzanine loans is that they often come with high interest rates compared to other types of traditional loans. On the other hand, they also come with flexible payment methods compared to other types of loans.

How Does a Mezzanine Loan Work?

Mezzanine loans are interesting to learn about since they’re a mix of both debts as well as equity. While it isn’t always this way, a mezzanine loan could provide a lender with equity in addition to the payments. A mezzanine lender will focus more on working with investors and businesses with a successful track record in the real estate market.

The most common use for a mezzanine loan is for a profitable business is a means to buy an existing business that is up and running or to expand your business into new buildings or resorts.

Mezzanine Loan Interest

A key thing to remember when it comes to a mezzanine loan is the interest rate that comes with it. The interest rate for mezzanine loans is often much higher than those of traditional loan types. It isn’t out of the ordinary for lenders to also ask for equity in your company in addition to the income they make off of the interest on the loan.

There are also several routes for the borrower to take when it comes to paying mezzanine loans. If there is not enough cash on hand to repay the loan then you can choose to capitalize the interest charges on your mezzanine loan. This is why it is a great option for Commercial real estate financing.

Subordinated Loan

Another thing to keep in mind when you choose to take out a mezzanine loan is that it is a subordinated loan. This means that the loan shows up as a lower priority when it comes to the loans a bankrupt company needs to worry about.

When a business goes bankrupt it will often sell its assets as a means to pay off the debts that are owed to creditors. When you don’t have enough money from those assets, the lenders get in line based on the loan type and where it falls in the hierarchy. Mezzanine loans are ahead of only equity in this line of different types of debt.

Benefits of Mezzanine Loans

One of the big reasons why real estate investors like to use mezzanine loans is because they gain quick access to capital that they can use for the purchase of an existing business or expand their own business. This is vital if you’re not able to secure a traditional loan that will cover the full costs of your expansion or acquisition.

It is also a great option if you’re wanting to decrease the dilution of equity in your company. Some purchases require you to take equity out of your existing properties. A mezzanine loan allows you to keep that equity in your properties rather than converting it into capital to fund your investment.

Another great benefit that you’ll gain from mezzanine loans is related to the taxes that your business faces. The interest from a mezzanine loan is money that you can deduct from your taxes at the end of the year.

You’ll also have a number of different payment options that you can choose from when it comes to repaying the lenders of the loan. The most traditional way to pay back the loan and the interest is with cash. Another common option is to add the lender to the loan balance. Equity is another option that you can choose to use as a way to pay back your mezzanine loan.

Your business’s balance sheet is the ultimate display of your business’s health. It is important that your assets outweigh your liabilities. Mezzanine loans are great for businesses and real estate investors because it shows up as equity on your business’s balance sheet rather than liabilities. It will help your business qualify for traditional loans from banks and other lenders.

Get Started With Your Mezzanine Loan Today

If you’re wanting to get started with a real estate investment business then it is important that you know the answer to “What is a mezzanine loan?” Mezzanine loans are a great way to close the gap between the money you need. Best of all, mezzanine loans show up as equity on your business’s balance sheet. This helps your business look better to traditional lenders.

For more helpful articles on a range of topics, check out more of our blog.

Arnold Bloom

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