For every 0.25% increase in interest rate, debt proceeds decrease by 3.00%
The Fed increased rates by 115% so far this year causing proceeds to decrease by more than 40%
Worse, some lenders have issued a moratorium requiring operators to be more creative.
Mezzanine and Pref Equity help make a deal possible rather than waiting for one that is not.
Both are types of debt, but what’s the difference?
- Preferred Equity – Uncollateralized, but often receives a pledge of sponsor’s equity/warrants, offers deductible interest, can delay interest payments. Offers a higher rate or return and is more secure in case of default through contract remedies including removing the sponsor from control.
- Mezzanine – Invests in the property owner. Positioned behind all debt, but ahead of equity. Rates are 2-3x higher but doesn’t participate in profit sharing. UCC foreclosure rights
Which should you choose?
If equity is a challenge, mezzanine allows you to bridge the gap between what the bank or bridge lender is offering and the capital you have raised so far.
The key is to avoid becoming too leveraged and underwriting to realistic exit rates – Gone are the days where you will sell a property for a three cap.
We are committed to helping you in these tough markets.
We have strong relationships across the capital stack.
For more information on how we can help contact us today.
I write seven days a week to help business owners and real estate investors:
✅ Accelerate value,
✅ Become better leaders,
If this was helpful:
👊 Please share this post with your network
👊 Follow me for more on strategic planning and finance
