Need Funding for Your Real Estate Project? 2 Terms You Should Know When Banks Get Stingy

If you've been searching for a loan to begin or continue the upgrade of a real estate project, you know (or will soon discover) that strict regulations and market concerns have many traditional lenders balking at making new loans to anyone but their best costumers. Even if such loans are made, traditional real estate backers aren't willing to cover 70 percent of your need, and may only be willing to leverage 50 percent of the loan. Rates and terms are stricter, too.

When formerly reliable financing sources keep a tighter rein on their investments, even the most conservative real estate developers consider alternative financing solutions. Debt fund investment sources and mezzanine loans are two options many real estate developers are becoming familiar with, and you should understand their place in the market, too.

Debt fund sourcing

Debt funds can be more generous in covering real estate loans because they aren't shackled by the rigid rules banks must now follow. Regulators consider banks to be playing with other people's money, so they want the banks to take fewer risks. Debt funds are fed by those who understand the risks and are willing to take them.

Despite how scary real estate investment may seem to banks, private investors are highly motivated to acquire real estate debt because it's seen as less risky than other vehicles of investment at the moment. More money is being offered up for large real estate projects, and a recent real-estate watch dog noted that debt funds are responsible for 21.5 percent of capital being raised for real estate development purposes.

Mezzanine loans

One product available through debt funds is the mezzanine loan. This loan is not about lovely second-story balconies but about the loan's place in the hierarchy of loan structuring. If a property goes into default, ownership is secondary to the primary equity investor. However, the mezzanine-level investor's interests are satisfied before shareholders and stockholders receive their cut.

The benefits to mezzanine loans are:

  • No change in ownership or control
  • Immediate repayment is often not required
  • Loan can be made long term

How to strategize for a mezzanine loan

You'll have an easier time securing a mezzanine loan when your project has good cash flow, will cause minimal local disruption around the property site, and you have detailed plans and numbers available for review. Also having all of the players in place and ready to go--from your primary funding source to your partners, shareholders, and contractors--gives debt fund investors more confidence in your expansion.

Having a proven track record with a debt fund financing source is another way to get easier approval for your loan. Build goodwill and trust by following through with all of your promises after you score that first debt fund loan. When everyone gets what they need from the deal, your debt fund source will be eager to work with you on projects in the future.