In real estate, mezzanine loans can provide the solution to a need for capital. Mezzanine loan providers, often called mezz lenders, finance the loans. There are many pros and cons to working with mezzanine lenders, and you'll want to evaluate them before you sign any contracts.

If you believe that mezzanine lending is your best solution, you may want to take a closer look at the services offered by the lending companies. Like most types of financing, the interest rate and term of the loan may vary by company. You may want to consider the following things before you select which company to work with:

1. Understand the basic concepts of mezzanine lending in order to understand the difference between it and other types of financing.

2. Review standard contracts for the industry and understand the type of contract the mezzanine financing lenders offer.

3. Find the right mezzanine lenders to work with for your situation.

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Discover the basic uses for mezzanine loans

Similar to other forms of lending, there are different types of mezzanine loans. You need to understand the basic concepts for this type of lending in order to evaluate the services offered by mezz lenders. You'll also want to consider the risks involved with this type of lending.

I recommend: Get the borrower's perspective on working with mezzanine lenders at HVS. The article provides a basic definition of a mezzanine loan and covers some of the problems with this type of funding. Preconstruction Programs offers an in-depth article that explains what mezzanine loans provide. It includes information on the common structures and terms you can expect.

Get familiar with the types of contracts that mezzanine lenders use

If you fail to pay a mezzanine loan on time, you may wind up forfeiting a percentage of the ownership in your property a lender. Legal documents, or contracts, spell out in fine print the terms and conditions of the loans. You can review actual contracts in order to get a better understanding of the type of contract you will need to sign in order to secure this kind of loan.

I recommend: You can browse through standard-issue contracts provided by The Consus Group at its website. It includes contracts from companies like Keybank, McGraw-Hill and La Quinta. Practice Technologies provides actual legal documents drafted by law firms for use in a mezzanine loan agreement. It provides descriptions of the different types of contracts that a mezzanine lender might use.

Evaluate the services available from companies that specialize in mezzanine lending

If you are looking for a company that works with mezzanine loan recovery, you won't want to call a regular lender. Each company offers a select grouping of services, and you'll want to work with companies that offer you the services you need to fulfill your business needs.

I recommend: Ocean Pacific Capital, a mezzanine lender, provides information on the type of loans it offers. You can also read articles written on mezzanine loans. Learn more about the services offered by Hunton & Williams, a company that specializes in mezzanine loans recovery at its website.

Mezzanine lenders are investors who see the potential in your project as clearly as you do and are willing to put up hard money for a stake in the project. Most mezzanine loans are made by real estate mezzanine lenders who buy in for a share of the stock in the property, as well as both real and residual profits.

Mezzanine loans are typically based on the practicality and profitability of the project and not on your credit rating. They can be done with little due diligence and are very safe for the mezzanine financing lenders, who can foreclose on your stock in a matter of days if you miss any payments. Turn to mezzanine lenders for capital to:

1. Leverage equity with a mezzanine lender for an existing real estate project

2. Purchase a dormant office building that has huge potential with real estate mezzanine lenders

3. Build a hotel on a hot property through mezzanine loans

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Turn to mezzanine loan providers for quick cash to grow your business

While you may not have enough equity in a property to get a decent line of credit from a bank, a mezzanine lender can cover your cash needs quickly in return for a high note in stock if you default on the real estate mezzanine loans. A mezzanine loan will show up on your financials as an investment rather than a debt, making the deal even sweeter.

I recommend: Commercial Lending Group is a worldwide provider of real estate mezzanine loans with a quick online application or try Wells Fargo.

Draw upon your experience to secure mezzanine loans

Often, an experienced real estate developer can attract eager mezzanine loan providers based on a successful history of picking winners. A seasoned developer can see potential in a poorly managed property and receive a large percentage of the capital to purchase the property from real estate mezzanine lenders.

I recommend: American Capital is an international mezzanine lender always looking for pros with whom to partner. Gelt Financial specializes in commercial and investment properties as mezzanine financing lenders.

Get a payoff for your keen sense of timing for a new hotel development with mezzanine lending

When the financial markets are soft in a particular industry such as hotel development, international mezzanine lenders and local mezzanine loan providers are more willing to take the risk and reap the bigger rewards with you. Look for mezz lenders who take the big risks and will trust your track record.

I recommend: Ocean Pacific Capital can act as a conduit to help you find the right real estate mezzanine loans for your hotel development. Private Equity Info provides an in-depth database of mezzanine real estate lenders.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Beware of the smooth talkers in the mezzanine lending companies who make promises that sound too good to be true. There is a price for every loan. Be sure to enter into the agreement fully aware of all the consequences of a default.

Mezzanine lending is a combination of equity and debt financing that usually helps expand a currently existing company. This type of lending is swift with very little or no collateral required, and carries a high interest rate. It can be difficult to obtain a mezzanine loan because the company has to display a proven track record of profit and have a well organized business plan.

These loans are attractive to privately owned companies because the lender does not want involvement in the company, but, if the company defaults, the mezzanine lender has rights to acquire equity interest or ownership of the company. For more mezzanine lenders education and training and a deeper understanding of these loans, explore the following information:

1. Get information from articles and videos about mezzanine loans.

2. Seek mezzanine lending information from training courses.

3. Attend conferences with other mezz lenders to expand your abilities.

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The best contacts and resources to help you get it done

Obtain mezzanine lending information from articles and video training

Understanding mezzanine loans helps with the mezzanine loan definition. A mezzanine loan is typically late-stage financing provided to a company by a venture capitalist or a private investor just before a company goes public. However, the expectation is that the company will repay the loan with proceeds from the public sales within the year.

I recommend: Preconstruction Programs explains real estate mezzanine loans. "The Mezzanine Financing Endorsement," an article by John C. Murray, discusses a mezzanine loan. Commercial Mortgage Training offers a video training course to assist with construction loans.

Find mezzanine lender training worldwide

Mezzanine lending is slightly different from traditional lending practices, so take the time to attend training. Check for statistics about the success, failure or number of mezzanine loans - they are hard to find. These types of loans are typically handled privately, so many of them avoid the standard documentation course for record-keeping. Mezzanine loans are available internationally, so training is offered in the United States and overseas because mezzanine lending companies are prevalent worldwide.

I recommend: First Finance offers a two-day course to learn techniques of mezzanine lending. PLi (Practising Law Institute) provides listing of training in a variety of formats. Mezzanine real estate lenders have the opportunity to learn about protection in foreclosure with a Strafford teleconference.

Connect with other mezzanine financing lenders by attending conferences

Conferences offer the chance to exchange ideas and information with other mezzanine loan providers. Learn tips and tactics from other lenders' experiences, and take advantage of these opportunities to expand your network connections.

I recommend: Information Management Network has conference listings that include international mezzanine lenders. Check out the Northwest Growth Financing Conference to network with leading investment firms in the United States. Atlantic Conferences offers a symposium addressing middle market and mezzanine financing.

Mezzanine lenders help business owners make up the difference when they cannot afford the down payment on a loan. Those that are just getting started in the industry may find that there are a number of new terms that they are not familiar with. It's important to know whether the loan you are giving is senior or subordinated debt or whether you will have profit participation or an exit fee. Take the time to learn some of these common terms before you get started.

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Investment property

Mezzanine lenders do not want to work with residential properties. Instead, they are looking for an investment property. An investment property is a property that generates an income, such as an apartment building or commercial office space. By only offering mezzanine loans to these types of properties, the lender is hoping that the borrower is less likely to default on the loan.

I recommend: MSN Money discusses how to find a good investment property.

High LTV mortgage

A high loan-to-value mortgage, also known as a high LTV or HLTV, is a mortgage where the amount of the mortgage is high when compared to the value of the property, in some cases even exceeding the value of the property. Mortgage lenders typically want to loan 80 percent or less of the value of the property. Mezzanine lenders primarily deal with high LTV mortgages.

I recommend: Real-Estate-Owner.com discusses high LTV mortgages.

Senior debt vs. subordinated debt

When an individual has two or more loans, one of them is the senior debt and the others will be the subordinated debt. The senior debt takes preference in payment, should there be a default and liquidation of assets. Mezzanine loans are usually senior debt.

I recommend: Private Equity Info Blog describes the difference between senior debt and subordinated debt.

Profit participation vs. exit fee

Profit participation and an exit fee are two ways that mezzanine lenders make their money. With profit participation, they receive a portion of the business' profits. With an exit fee, the business pays a high fee at the end of the loan.

I recommend: Learn whether profit participation or an exit fee is the better deal at Retail Traffic. This issue is discussed about halfway into the article.

Preferred equity

Preferred equity is a type of mezzanine loan, where the lender makes an investment into the business to receive preferred equity.

I recommend: Visit the C-Loans Blog to learn more about preferred equity.

Commercial construction loan

A commercial construction loan is a loan for the construction aspect of a property's renovation. Most traditional lenders will not agree to this type of loan because it exceeds the value of the property. Mezzanine lenders frequently work with those that have a commercial construction loan.

I recommend: Business Money Australia talks about commercial construction loans.