The mezzanine financing market is heating up in the first quarter of 2010, with all-in rates dropping and more lenders re-emerging from the shadows. And while the rates and terms being offered today aren’t exactly aggressive, they are starting to come back down to earth and resemble historical norms.

“The market is loosening up incredibly in the last 60 days; it’s really taken a 180,” says Gary Mozer, managing director of Los Angeles-based George Smith Partners. “People are trying to put money out now, which is a big difference from last year. We’re seeing a lot of money getting a lot cheaper and more flexible.”

For the most part, mezzanine debt is being priced in the 12 percent to 16 percent range, down from 14 percent to 18 percent a year ago. The cream of the crop can access rates near 10 percent these days, while riskier transitional assets may get up to 18 percent. Still, the long-term average for mezz loans is around 12.5 percent, so the prices are a bit high by historical standards.

RCG Longview, one of the multifamily industry’s most prolific mezz lenders, remains active. And there are a handful of large mezzanine providers that have grown more active recently, including mortgage REITs Starwood Capital Group, Ladder Capital, and Colony Capital. For the most part, these mezz providers are offering 1.05x debt service coverage ratio (DSCR) requirements, though given today’s fundamentals, few deals make it that far.

New Era
Still, it’s a turnaround from last year. Throughout 2009, the market for mezz debt was effectively stalled. Lenders began focusing more on the losses racking up in their existing portfolios, and uncertainty over the depth of the recession muted activity. Plus, the fact that Fannie Mae, Freddie Mac, and the Federal Housing Administration were offering leverage levels around 75 percent lessened the need for mezz financing.

“People are becoming a little bit more comfortable that, no matter where the bottom is, it’s not going to be too far from here,” says Dave Valger, director of New York-based RCG Longview. “And both Fannie Mae and Freddie Mac have pulled back to where you’re seeing average loans in the 65 percent range. Underwriting, performance, and values are all reducing senior loan proceeds and creating a larger void for us to fill.”

Last year, RCG Longview closed a $600 million debt fund to originate bridge and mezz loans. The company invested about 30 percent so far but still has about $500 million in capacity. When the fund was closed, the company saw a lot of opportunity in lending to owners with significant amounts of deferred maintenance. But in a sign of the times, RCG is also targeting the program more to lenders who find themselves unwitting owners and struggling to deal with REO.

Indeed, most of the demand for mezz is on the defensive side: to recapitalize an asset through a discounted payoff, for instance, or to fill the gaps on a refinance. The focus for RCG this year is cash-in refinancings, where a borrower with a maturing construction loan or other short-term loan seeks to refinance.

Taking Charge
The issue of maturing loans hangs like a dark grey cloud over the multifamily industry. But Freddie Mac, for one, is taking the problem into it’s own hands. The government-sponsored enterprise (GSE) recently announced it would soon partner with a handful of mezz providers to help refinance over-leveraged properties.

The program was still being ironed out as of late February so much remains to be seen. But the intent is that partnering a senior loan with a mezz piece will allow owners to borrow up to 85 percent of the property’s value when refinancing.

The GSE said that the program isn’t intended to rescue deeply troubled properties, where values have fallen so far that there’s no equity left in the deal. Instead, the company will target good owners stuck in bad markets, cash-flowing properties of experienced borrowers victimized by declining values. 

“This would be a solution for the refinancing of over-leveraged properties,” says Mike May, senior vice president at McLean, Va.-based Freddie Mac. “The mezz would be provided by a third party and we would work with several mezz providers for the program.”