Opinion: The Secret To Gap Loans

COLUMBUS, OH-Mezzanine or “gap” lending has become an important, quite prevalent component of financings in the retail sector of real estate, whether for all-new development, redevelopment, repositionings or acquisitions of properties. This is especially so as retail continues to dominate all real estate sectors in value creation.

• The mezzanine financing option is appealing to developers and investors for many reasons:
• The amount financed can vary; it need not follow a set formula.
• It fosters flexibility in project timing and often comes to the rescue of deals that threaten to unravel at closing time due to last-minutes changes.
• It allows developers to employ their cash over a greater number of projects without an excessive commitment of personal assets.

In the past, mezzanine lending was viewed as a niche financial product with fewer established players handling the bulk of the transactions. This lending arena has considerably broadened in recent years, with many new entities conducting mezzanine lending. The reasons why include increasing familiarity with mezzanine lending by the development and lending communities as a whole, the customary flow of money to opportunity in our free market economy and, as noted already, the fact that retail has been such a hot real estate segment.

The approach to working with a mezzanine lender should be like any other strategic partnership in the development process. Look for a track record of success in similar situations. And, make every effort to build a long-term relationship in order to steer clear of potential shortsighted decisions. Long-term relationships continue through thick and thin, where both parties are as good as their word.

The best mezzanine lenders offer speed in the decision-making process. Timing is critical in modern retail as developers juggle land-purchase options, municipal approvals, tenant commitments and demands, or construction resources. Once a project is approved, everything must happen quickly. Time to market can make or break a project and, as part of the financing team, the mezzanine lender should understand that.