Greystone, a leading CMBS lender, has launched a product that allows owners of commercial real estate to borrow even more against the value of their multifamily properties, office buildings, hotels and industrial properties.
The company now offers mezzanine loans, a kind of second-lien debt, to borrowers obtaining a first mortgage destined to be bundled into collateral for commercial mortgage bonds.
It’s another example of a nonbank filling a lending void created as banks pull back in response to regulatory pressure. Before the financial crisis, many banks offered mezzanine loans to CMBS borrowers, but this has become much less attractive for them under capital requirements were revised following the financial crisis.
Greystone’s CMBS mezzanine loans range in size from $500,000 to $5 million and have terms of five or 10 years, the same as the first mortgage. The loans may also pay only interest, and no principal, for their entire terms, consistent with the first mortgage. Coupons range from 12% to 15%, depending on the loan-to-value ratio, debt service coverage ratio and sponsor.
That’s a market segment that is not well served by either banks or debt funds, said Rob Russell, head of CMBS production at Greystone. “This mezzanine loan product meets a need for capital that is overlooked by traditional providers of mezzanine financing due to the smaller size — yet it’s still a critical component of the capital stack,” Russell said in a press release.
By comparison, there are more debt funds offering mezzanine loans of $20 million or more, according to Mark Jarrell, Greystone’s corporate executive vice president in charge of nonagency lending. That means the market for these larger mezzanines loans is competitive, and the returns less attractive.
In a telephone interview, the executives said that the mezzanine loans Greystone makes will be kept on its balance sheet, even after the accompanying first mortgage is securitized. “We like the yield, it works for us,” Russell said. “Our clients like it, too. The fact that we hold onto the paper gives them a lot of comfort.”
Even with the additional mezzanine financing, the properties will be less heavily leveraged than they would have been before the financial crisis. That’s because today’s CMBS conduits typically pool mortgages with loan-to-value ratios of no more than 70%, whereas, pre-crisis, a first-mortgage might have had an LTV of 80%.
This leaves room for Greystone to offer additional financing that keeps the leverage on a property below the 85% to 90% LTV typical of mezzanine debt offered pre-crisis.