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Shopping Centers Today -> March 2004
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MEZZANINE FINANCING COMES OF AGE
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“It is an outgrowth of the amount of capital available on the market,” said Allen O’Brien, a managing director at NetFunding.com, an Atlanta-based commercial real estate brokerage. “Most REITs are offering mezzanine financing options.”
In a first for the CMBS business, Short Hills, N.J.-based mezzanine lender Mezz Cap plans to sell bonds backed by small-balance mezzanine loans. Mezz Cap wants to offer some $70 million to $80 million worth of these bonds, sources say. Mezz Cap did not disclose the terms and declined to speak to SCT. But knowledgeable sources said at press time that the deal was circulating among private investors.
The deal will be secured by a diverse pool of loans, the sources say, which is Mezz Cap’s modus operandi. According to its Web site, the lender traditionally grants loans with balances ranging from $250,000 to $2 million, at a fixed rate of about 13 percent.
Lenders assert that, aside from generating further liquidity in commercial mortgage lending, the deal could make mezzanine lending the norm in the first-mortgage market.
To be sure, retail REITs are stepping up their own mezzanine financing to other property holders. But that’s not just about lending money; under the right circumstances, a REIT offering a mezzanine loan on a property could eventually own it, at least in part.
Mezzanine debt is subordinate to the first mortgage but senior to the property owner’s equity. Borrowers use them to scrape up capital against a property’s value above the 75 percent limit typically imposed by first-mortgage lenders. Mezzanine lenders protect themselves, in the event of a default, by obtaining a pledge of an interest in the entity owning the property.
When making these mezzanine loans, REITs typically use the same investment criteria they would if they were buying the property. “They are putting financing on properties that they would not mind owning in the event of a default,” said O’Brien.
That is certainly what Orlando, Fla.-based Commercial Net Lease Realty was thinking when it offered its first mezzanine loan last fall to an owner of 10 office buildings in the Los Angeles and Sacramento, Calif., areas. Commercial Net Lease declined to disclose terms of the transaction, but David Cobb, executive vice president and chief investment officer, did share something about the company’s investment strategy.
“We’re using part of our funds to make mezzanine loans in lieu of buying property,” said Cobb. Commercial Net Lease has no plan to launch a separate mezzanine program, he says, but it will do more such deals as opportunities arise.
An abundance of cheap debt and keen investor interest in the property sector is turning up the heat on REITs, which are driven to expand their portfolios and deliver growth in funds from operations, Cobb says.
Companies are moving aggressively to expand their mezzanine loan activity. In late January Needham, Mass.-based CWCapital, for example, acquired Lend Lease Corp.’s mezzanine finance group, in a move to make itself a one-stop commercial lending shop.
Observers expect mezzanine loans to remain the belle of the ball so long as the (low) interest rate band plays on.
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