I would like to develop multiple self storage sites and include investors (family and friends) but I do not want to give away equity. Has anyone used mezzainine debt? What rate of return did you pay and any other details you can share would be helpful. Thanks in advance for answering my inquiry.

Tom

P.S. For those that do not know, mezzanine debt is secured by an ownership position in the borrowing entity rather than the mortgaged property collateral; it is a pledge of the ownership interests (typically the LLC) rather than a pledge of property. This is a very important distinction because in the case of a mezzanine loan default, the holder of the note will likely have the right to foreclose upon the equity interest in the property. Mezzanine debt can be useful because it may allow a borrower to obtain secondary debt financing without violating the terms of an existing mortgage loan agreement that does not allow for secondary debt against the property collateral itself.

I think most mezzanine debt has dried up due to the losses suffered in the credit markets. While 12% was the going rate early in 2007, I think you would have a hard time finding it below 14% today, and probably only on stabilized properties and in amounts in excess of $3 million per property.

Tom Vrabac

Tom, great response. Maybe $5m minimum. Sponsors should be "solid gold". The money is out there, but you will need a good story as to why you do not have the equity. There are some sources that will do a cross collateralized deal...rates are a little higher. Mezz debt can be messy.

As with any investment, keep in mind, the higher the risk, the higher the rate, the higher the reward.
CHEERS!

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