The Fed raised rates for the fifth time this year to curb inflation.
Rising rates will create funding gaps to close a business or commercial real estate transaction.
Bridge loans offer short-term, flexible options with a higher rate of interest, but limited leverage.
Mezzanine finance helps reduce or maintain a borrower or sponsor’s equity requirement.
This tool is a hybrid of debt and equity and aids in filling the gap in the capital stack.
Mezzanine is cheap equity even if the rates are mid-teen or low 20s since it doesn’t dilute ownership.
While you may lose short-term control, there is flexibility to restructure the loan into one senior loan if the real estate project or company grows as expected.
Interest is tax deductible and reduces the actual cost of debt.
In a rising rate environment, mezzanine finance helps to build a capital stack where your project or business has a short or medium time horizon.
Pros:
- Patient Capital
- Cheap Equity
- Flexibility
- No Dilution
Cons
- High Rate of Interest
- Slower process to close
- Restrictive covenants
- Some control lost
Have more questions about mezzanine or bridge finance? Drop it in the comments.
