Mezzanine Debt

Mezzanine loans are back in vogue with hotel investors and developers turning to this financing tool for their latest acquisitions, recapitalizations, and leveraged buyouts. “Senior lenders are getting more aggressive,” says Geoffrey Davis, president and senior principal of HREC Investment Advisors. “They’re going up the capital stack—up to 70 percent loan to value—but they still have a specific box they have to fit these loans into when it comes to quality sponsorship and historic cash.” He says projects that don’t fit neatly in this box often need bridge and mezzanine pieces to work. “And with senior lenders getting more aggressive, the cost of mezzanine loans has had to come down.”

A good example of this is a maturity default, in which the value of the hotel is equal to the total level of debt against the property. “You can’t refinance a property at 100 percent loan-to-value [ratio] so you need to rebuild the capital stack,” says Davis. “So there’s more of a need now than a few years ago for debt products like bridge and mezzanine loans. They are ways to apply leverage and to allow tougher transactions to happen, whether that’s a refinance or an acquisition.”

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