Mezzanine financing becoming more popular.

In today's uncertain economic climate, borrowers are searching for new and imaginative methods to attain aggressive levels of leverage from new capital sources.

At AFC Realty Capital, we have been actively using several structures to provide levels of debt that exceed those of traditional lenders. One such idea that is gaining increasing popularity is Mezzanine financing.

Essentially an extra level of structured financing that is typically used in acquisition or development transactions, mezzanine financing allows the borrower to increase leverage levels by 10-20% over standard first mortgage debt. Although leverage levels are significantly higher, the borrower is able to keep all ownership and control over the asset.

This approach was not necessary when the economy was expanding and "vanilla" lenders often advanced 80%-85% loan to-value ratios on acquisition or development.

Today, with LTVs often down to as low as 70%, the difference between the loan amount and the funds required has become too great to effectively be funded by traditional equity. As a result, borrowers are turning to Mezzanine investors! lenders to provide capital that was previously available from first mortgage lenders (e.g. bank, insurance companies, conduits).

An example of a recent transaction completed by AFC Realty Capital was for a Hilton Hotel in New York City. Traditional bank financing did not provide adequate funds for the completion of the property. The developer turned to AFC to provide an additional $3 million to complete the property. He was prohibited from securing a junior lien on the hotel, and also did not want to give up an equity interest in ownership.

We arranged financing that required payments at a pre-determined interest rate with no mortgage lien on the property or equity interest in the ownership. This allowed our client to obtain the funding required to complete the property, while retaining all of the upside.

Another structure to provide a more favorable level of leverage is known as an "A-B" loan. While this instrument has often been used in larger transactions in excess of $50 million, AFC has been involved in a principal role to allow this structure to be available for transactions of $5 million to $25 million. By purchasing or guaranteeing a subordinate or "B" note, borrowers are able to qualify for higher loan amounts, substantially improving their cost of capital.

A current example of an A-B loan includes a retail property AFC Realty capital was recently involved with in Manhattan. AFC's credit enhancement allowed the borrower to qualify for financing which significantly reduced the cost of capital and improved overall loan terms.

The change in the lending environment has created opportunities for both innovative lenders and borrowers. Lenders are able to increase their yields on quality loans and borrowers who can be flexible and access these new sources cf capital will increase their yields by taking advantage of today's favorable interest rate environment.

We see this trend continuing until the economy stabilizes and begins to expand. Mezzanine and other creative financing techniques will play a prominent and vital role in attaining attractive leverage levels. Borrowers must be flexible and pro-active to secure high levels of leverage from the vanguard of lenders willing to fill the void created by more conservative first mortgage underwriting standards.