Since then the interest rate landscape has changed, The market for commercial real estate is in difficult waters, something new- or follow-up financing becomes a balancing act. Mezzanine capital offers a potential solution, however, requires careful consideration.
During the years of falling interest rates and the continuous rise in property prices, lenders rarely had reason to worry about the repayment of their loans. New financing or refinancing of existing loans, be it for project developments or existing properties, turned out to be unproblematic, since the continuous increase in value always offered sufficient security.
But with the interest rate turnaround, the tide has turned. The market is now in a phase of reorientation and price discovery. Sellers strive for minimal loss of value, while buyers are hesitant due to rising interest rates, Buy real estate without a discount. Expiring financing can lead to problems, as new financing is often either not possible or is only offered at reduced conditions. In this situation, owners and project developers are forced, either to bring in fresh equity capital or to close financing gaps by taking out hybrid financing such as mezzanine capital.
Devaluation of the property can cause additional problems during the financing term, especially if financial metrics such as the loan-to-value ratio are broken due to this devaluation. In such cases, banks may require partial repayment of the loan or the deposit of cash reserves, which requires additional capital, which are not always available.
The reactions of credit institutions to such scenarios vary. Sometimes waivers are provided under certain conditions (so-called waivers) granted, while other institutions insist on partial repayment or even consider terminating the loan, if the loan is classified as at risk of default.
Debt funds as an alternative source of financing can help in such situations, by providing mezzanine capital. However, both the project and the mezzanine financing must fit the requirements of the fund. Because the demand is high, Mezzanine investors can currently choose their projects.
Higher risks are usually offset by correspondingly higher interest rates and possibly by participation in the company's equity or profits. Depending on the risk profile, interest rates can be well over ten percent per year, which may affect the sponsor's return on longer terms or higher leverage.
In cases of financing problems, sponsors must, Owners and external financiers work together constructively, about exploitation- or to avoid insolvency scenarios. Extensions or standstill agreements can contribute to this, to stabilize a project, but there are legal barriers, which are intended to protect the interests of other creditors.
If everything's falling apart, This can result in the realization of collateral and the insolvency of the property owner. Restructurings are becoming even more complex, the more creditors are involved. The senior secured creditor will likely wait patiently, while subordinated secured creditors may push for it, sell the property or take it over yourself.
The current phase in the commercial real estate financing market represents a stress test, which will show, which market participants master these challenges and emerge stronger from them.