Mezzanine Financing for Real Estate

On Mezz there is typically(or can be) and interest rate(current pay) on the junior debt(Mezz) as well as an accrued rate. So in years where there is no cash flow from construction or "other" mezz will accrue at at the accrual rate for repayment in the exit year. What the lender and owner are hoping, and this goes to the above point by investREanalyst that there better well be an exit plan like a project increasing in value in the exit year, enough to carry the accrue(unpayable) debt and then the balance of the mezz. Most mezz from my limited experience would be modeled very similar to an equity waterfall.

*This is purely my understanding I would love to hear contrary of clarification.

I just re-thought this through. (edit). I believe the accrued rate is on not drawn mezz for construction only. For stabilized product the accrue rate is the nominal rate/365 and the unpaid debt service would be taken out of the sale or refi proceeds in the exit year at the reinvestment rate.

Disclaimer: my experience with mezz is limited to a CMBS context. That said, bear in mind that your mezz structuring will be iterative with your senior structuring. Depending on what kind of senior debt you get, that lender may stip a DSCR on their piece and through the stack, e.g. 1.30x on the senior, 1.05x or 1.10x through the mezz. The senior probably also wants to stip caps on LTV and DY, and both lenders may have different ideas about reserves etc. Not to mention intercreditor agreements. If you haven't already, it'd be worthwhile for you to reach out to some of the senior lenders you'd be prospecting for whatever deal you're thinking about and ask them how much mezz they're likely to tolerate and if they have any easy avenues for mezz or preferred mezz partners they've lent alongside. Some senior shops have the capability of doing an A/B note, which could make the process easier if you're only dealing with one party. I'm guessing you're looking for bridge but the above still applies.

So for a mezzanine finance capital stack structure, I suppose there would be sort of a minimum property yield before taking on such debt would help to boost its equity returns right? I mean does it make sense to take on such complex debt structures if the initial yield for the property gets eroded, given that mezz holders would want cash sweeps, shorter maturity etc.

Based on the link shared by investREanalyst earlier, it seems that mezz structures are not exactly suitable for non-stabilized properties.

Any thoughts from experienced guys out there? Thanks.