Mezzanine Financing in Community Economic Development

Post Renovation Mezzanine financing, or mezz debt, can play a critical role in the funding of a community economic development project and has other advantages discussed in this post, but what exactly is it, and how does it work? Financing the renovation of historic buildings is far more complicated than new construction on vacant land. Reuse of an older building adds both risk and limitations to the project. For example, the removal of hazardous chemicals adds risk, or low ceiling heights limit potential future uses. Because of this increased risk, traditional lenders are even more conservative when analyzing these projects and will often only lend up to 50% of the total redevelopment costs. If the developer defers the majority of their fee and does a great job applying for and receiving tax credits and grants, they can get up to 30% equity to finance the project. But, after all this work, there is still a 20% hole, or gap, in the financing; this is where mezzanine debt comes into play. Mezz debt fills the gap between what a typical lender will loan to a project (the senior debt) and all equity sources for the project. Project equity can come from a variety of sources, like the developer him/herself, grants, or tax credits, but the thing all of these funds have in common is that they are all ‘patient money,’ meaning, they have much more generous or flexible payback terms than debt from a traditional lender. Because mezz debt plugs this hole in the financing between a bank loan and equity, [...]