How is mezzanine financing used in multifamily?

Good question.

Let’s take an example of purchasing an apartment community that costs 10 million. Let’s say the first lien lender will supply 70% of the value or loan 7 million at perhaps 6%. The sponsor now needs to contribute a 3 million down payment.

Let’s now assume that the sponsor wants to find a way to reduce the down payment even further; they might be able to accomplish this with mezzanine financing.

They would approach a mezzanine lender and agree to assign their interest in the LLC that will own the multifamily asset in return for some cash that helps them reduce their down payment from 3 million.

Let’s say the mezzanine firm agrees to provide 1.5 million towards the down payment. The mezzanine firm now has a preferred position in the LLC and will be entitled to receive principal and interest before the borrower can draw any income from net cash flow.

This mezzanine debt is subordinate to the first mortgage. The sponsors (the borrowers that put the deal together) still own the apartment community but before they can tap into the net cash flow the mezzanine firm has to be paid first. So the mezzanine firm is in a superior position now to the owner but inferior to the first lien mortgage.

It is important to understand these terms since the general partner you invest with might use them.

I offer education and training to landlords, engineers, doctors and dentists, and many others that would like to learn how to enjoy the benefits of multifamily as quickly as possible. If that sounds interesting contact my office by going to www.benjaminzmiller.com and fill out the contact form.

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I hope that helps and good luck with your investing!

Benjamin Z Miller
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