Mezzanine financing remains readily available to help bridge declining property values in situations where the refinancing of existing debt with a new first mortgage alone cannot pay off maturing debt. A typical 65% loan-to-value first mortgage can be increased to 75% using a mezzanine structure. For example, Chicago-based Pearlmark Real Estate recently wrote a $12-million mezzanine loan on the 841,000-square-foot office building at 1700 Market Street in Philadelphia, PA. The coupon is 11.25%. The $111-million senior mortgage on the property was written by UBS.
“We have used mezzanine financing on a few of our CMBS transactions,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “The rate on the loan often is more than borrowers are willing to pay, but if you look at a blended rate on the combined first and mezzanine loan, the rate does not look that bad, penciling out in the 6.5% area right now. Plus, it sure beats injecting cash equity into the transaction to make up the difference between the first mortgage loan and the payoff.”
A challenge is that mezzanine loans are legally complex to structure. As a result, most mezzanine lenders want to make loans $10 million and up, impying first mortgage loans in the $100-million area. “These first mortgage levels are higher than we typically originate,“ said Jim Brett, senior underwriter at ValueXpress. “However, we have developed a few mezzanine relationships that will provide mezzanine loans in the $2 million-and-up category, implying smaller first mortgage loans in the $20-$30 million range, consistent with our origination levels.”