Mezzanine / 2nd Mortgage Finance
Link Commercial Mortgages may structure mezzanine / 2nd mortgage finance to support senior debt in assisting to fund almost any property investment or development project.
Second Mortgage funding may be provided by any one or a number of individual investors or by institutional lenders. The terms of this type of loan vary, typically to a maximum exposure of 80%-85%.
Mezzanine funding is also called “Pseudo Equity” because it replaces Equity to a certain extent; but the cost of mezzanine debt is different in scale and tax treatment to the cost of equity:
- debt is tax deductible (a before tax cost) and typically costs less than equity
- the cost of equity is an after-tax share of profits, ie; a split of residual profit after tax has been pai.
The Interest Rate for mezzanine / 2nd mortgage
finance can vary greatly.
Maximum lender exposure is 80% - 85% of Project Costs; but may depend on any number of factors.
If used effectively, Mezzanine Funding may increase the Return On (Developer’s) Equity in a project, ie; it will give you “more bang for your buck”. Put simply, a project will return a certain profit and the less dollars you invest in it from your pocket to make that project profit, the higher the return on your equity:
The after interest return is slightly less with Mezzanine (because of interest cost on mezzanine debt), however, divide that return by how much equity is contributed and the result will amaze you in comparison.
Return on Equity = Project Return (profit after interest)
Equity (equity contribution)