Do I Need Mezannine Bebt?

Question

I am leading a multifamily high-rise development in Colorado Springs and i've never done anything in this space before. Is mezannine debt a common way of funding all of the development costs (Entitlement,Design, Permitting, etc.) before raising capital for the construction?

Don Konipol · Answer

@Joshua Kolnitys

The development costs you mention are not actually development costs, they’re soft costs.  They are almost always funded by equity capital, not debt.  Mezzanine financing is used as an in between equity and debt, and usually carries a relatively high interest rate with an equity kicker.

On another note you might want to consider bringing in an experienced developer and consider turning over the project to him for a small participation and learning experience.  Large commercial projects, unlike purchasing a SFH, are not a learn by trial and error type situation.

Robert Carpenter · Answer

Joshua I've been wondering the same thing.  I think of mezzanine debt as similar to a second mortgage on a house.  Its a loan smaller in amount than the first - but with a higher interest rate than the primary loan owing to its subordinate place in the 'stack'.  Hopefully someone who actually knows what he's talking about will be along soon to set the matter straight.

Just found this informative site: http://www.pentamezz.com/about...

I got interested in this subject after listening to the great Mike Milken explain how he made his billions as an employee of Drexel Burnham back in the 1970s.  Milken conducted exhaustive research on companies - concluding that high yielding 2nd lien loans could in fact be a safe investment - in spite of the term 'junk bonds' they were branded with.