Apartment Building Loans with 15% down payment:
Are high leverage loans available for traditional apartment buildings? Yes, in major and standard size markets. For the traditional apartment complex with a value well over $5 million Mezzanine funds are available. We can help place the first mortgage on the property, also known as the Senior Loan as well as the Mezzanine Loan. Non-recourse Mezzanine funds come in behind the Senior Loan. While the Mezzanine Loan walks and talks like a second mortgage it is not a second mortgage. In a second mortgage just as the phrase implies the collateral supporting this debt is a mortgage behind the first mortgage (or Senior Loan), thus in second position. The collateral pledged to support the Mezzanine Loan is pledge of equity of the borrower. The borrower would pledge its ownership interest in the subject property. If the borrowing entity is a corporation the borrower/principals would pledge all of the stock, if a limited liability company the borrower/principals would pledge the Members Units.
The Capital Stack would appear as follows:
Equity: 15% – 20%
Mezzanine: 5% – 15%
Senior Loan: 65% – 80%
The Senior Lender and the Mezzanine Lender would enter into an inter-creditor agreement. Several nationwide lenders offer a one stop shop. These lenders provide both the Senior Loan as well as the Mezzanine Loan.
What terms are available and what will the Mezzanine Loan costs? When you see the costs, don’t stop reading until you see the blended rate. The loan terms range between 5 and 10-years. The amortization schedules are normally aligned with the Senior Loan. So, if the Senior Loan is for 10-years with a 30-year amortization the Mezzanine Loan would be for 10-years with the same 30-year amortization. The pricing or interest rate for the Mezzanine Loan ranges between 12% and 15% depending on the amount of leverage, market and sponsor strength. At this point I would expect you to say no way would you pay this much for a loan. You should consider this type of funding in place of equity. What return would an investor require? If you needed an extra 5% of equity to round out the 20% equity requirement to close this would mean the equity investor would own 25% of the project, they would be entitled to 25% of the net income, 25% of the tax benefits and they most likely would have a vote on how the property will be managed. While the Mezzanine Lender would not have ownership or votes on how the property is managed. Let’s examine the financial impact of a 5% mezzanine loan.
Purchase price of a property: $10,000,000
Equity: 15% or 1,500,000
Mezzanine 5% of the Capital Stack is: $500,000.
First Mortgage (Senior) Loan: $8,000,000
First Mortgage Rate of 5.25%
Mezzanine Rate: 12%
The blended rate would be 5.647%.
The Mezzanine Lender can consider a reduced Debt Service Coverage Ratio (“DSCR”) as low as 1.05x while most of the time the overall DSCR must be at least 1.10x.
Are Mezzanine Loans available for only Apartment Buildings? Mezzanine Loan are available for acquisition, refinance of stabilized multifamily, retail, office, hotel, industrial and self-storage properties financed simultaneously with the First Mortgage (Senior Loan).
Mezzanine Loans start at $500,000 and can go up to $5,000,000 with our preferred lender.
Call your commercial mortgage expert for more information about this exciting loan product.
Mike Caffrey: (913) 402-7077