Can someone give me a rundown on mezz debt?
1) What term will mezz lenders do? 2) Is it always interest only or do they also amortize in some circumstances? 3) Are there ever holdbacks in the loan? Is it always fully funded upfront? What if it is for construction? 4) What total DSCR, LTV, LTC, and DY are mezz lenders typically ok with?
EDIT: 5) Is it typically floating rate or fixed rate? Or is it closer to 50/50 and completely dependent on the deal?
As others have mentioned, this is usually all over the map. This is what I have seen in the past year:
1) Depends on the lender but can be anything. Typically it is co-terminus with senior.
2) Usually interest only, especially on bridge deals. If you're putting mezz on a core deal, then it might have some amortization.
3) Also all over the map. Typically, mezz lenders will want to force fund day one. If they have the capability to do future draws (a lot of mezz lenders aren't staffed like construction lenders for frequent draws), then they might agree to future funding.
4) Super broad question, but here's some loose guidance:
@zacksc11" I think that you misunderstood my example.
In the example, I was trying to show that the original equity investor gets wiped out in the event of a mezz foreclosure. In most of those cases, the mezzanine partner has the option to take over the equity part of the investment. You are correct in saying that in the real world, the example that I provided above is highly unlikely since the property would probably need to drop below $85MM for that type of foreclosure to happen. Unless of course, there was a unique situation where the cap rate was incredibly low and therefore could not achieve debt service but building values remained high (Edit: there would also have to be almost 100% accrued interest in that scenario).
I disagree with your assessment that mezz lenders are not in the business of owning/operating property. Increasingly, more traditional investment funds have been going into the mezzanine space due to the incredibly low yields seen in the equity markets. The (proforma) premium paid to pref equity investors over mezzanine investors is incredibly low and mezzanine investors are more protected on the downside.