MEZZANINE
CAPITAL

Emerald Mezzanine
Capital for
Real Estate & Land Acquisitions

Emerald Mezzanine offers tailor-made financing solutions from the perspective of the borrower and is a remarkable provider of mezzanine, like bridge capital for new construction projects and existing developments in German-speaking countries - especially in the speed of decision-making and provision of the required capital. The special feature of Emerald Mezzanine: Where usual financing partners stop working, we start with passion for your work and success of your project realization.

Mezzanine capital -
The new normal
in real estate
economy

The steadily increasing regulation (Basel III and IV) leads to banks demanding an ever higher equity ratio from the project promoter. While usually several projects have to be processed at the same time, the equity capital requirement of the project promoter thus grows considerably and a financing gap often arises, which can be closed e.g. by a subordinated loan (mezzanine capital). This gives the project promoter greater entrepreneurial flexibility.

Mezzanine and bridge financing are thus not a specifically defined business model, but a means to an end, like other measures of real estate management. In this respect, bridge loans are used for commercial or residential purchases in order to enable a quick settlement of the real estate transaction, or to temporarily bear short-term opportunities of the market and to use them in a value-creating way. The bridge loans are usually repaid when the property is sold, refinanced with a traditional lender, completed or revitalised.

Due to the restrictive lending policies currently observed on the part of traditional financiers (banks), loans are currently being granted with significantly lower loan-to-value ratios, which means that bridge and mezzanine tranches can finance a larger share of the loan. Such a larger share also brings additional collateral, as a larger portion of the equity contributes to the coverage of the bridge or mezzanine loan.

In this context, bridge loans and mezzanine capital are used for the acquisition of commercial or residential real estate to enable the rapid settlement of real estate transactions or to take advantage of short-term opportunities as if to secure long-term financing.

Proven financing instruments are bridges such as mezzanine loans, which enable real estate entrepreneurs to seize opportunities from real estate investments and make the best possible use of the opportunities in the process.

Our financing solutions enable builders, developers and other players in the real estate industry to use financial resources very quickly, in some cases as equity. In structured financing, entrepreneurial subordinated capital is becoming increasingly relevant for real estate investments and part of the new reality.

The previous Corona crisis also caused indirect and accelerated financing challenges in real estate financing: The equity of project developers is limited, banks will have to digest real estate problem cases on their balance sheets in the future, so that they will further restrict their loan-to-value ratios.

On the capital side, the familiar market mechanisms currently take effect in crisis situations such as these: Reduction of loan-to-value ratios with higher risks on the part of the banks combined with syndicated financing, smaller lot sizes or at least partial personal liability. In the own funds sector. the time of entrepreneurial capital is setting in, which can now take advantage of the uncertainty phase and obtain favorable deposits. Counter-cyclically, this means that the market for riskier credit investments will expand strongly in the future.

Project developers who have run into difficulties due to excessive leverage structures, delayed timing, too thin equity cover in healthy projects or too much risk assumed by their own mezzanine provider can refinance themselves on a subordinated basis with a sub-tranche in the ever-growing real estate-related mezzanine market and thus bring their projects to a successful conclusion. This can benefit them through correspondingly good risk-return ratios of post-corona investments. At best, situations will continue to arise in which the outlined real estate projects can be absorbed by far-sighted investments and returned to their actual value.

Our financing solutions can thus be understood as an essential financing option under dynamically changing framework conditions. The financing takes into account your individual business model, as well as your corporate strategy and the respective real estate utilisation concept, and is ultimately reliable and resilent at the same time. Our key lies in understanding and balancing a balanced, appropriate and forward-looking allocation of opportunities and risks.

On this basis, Emerald Mezzanine evaluates your individual and viable financing solution.

The allocation process

01 ACQUISITION
Screening and acquisition of financing requests through deal sourcing;
Rapid review of available loan documents;
Evaluation and selection through closely coordinated internal coordination of Emerald Mezzanine.

02 ORIGINATION
Evaluation of information and conceptual development of the financing structure as well as coordination and pre-negotiation of
the indicative conditions and protection machanisms;
Submission of an indicative term sheet.

03UNDERWRITING
Comprehensive underwriting & due diligence process as well as  reconciliation of the final project, financing and collateral parameters;
delivery of the final term sheet,
targeted reconciliation of the loan agreement.

04 EXECUTION
Loan agreements are finally negotiated and drawn up.
The monitoring phase begins with the disbursement.

Alternative
financing
funds

↳ Mezzanine

With
financing
innovations like
Phoenix from the
ashes

Alternative German real estate financiers such as debt funds are gaining in importance, as banks are currently even more reluctant than before. Despite the immense current economic uncertainties, such as Corona, the Ukraine war, inflation and the associated rising interest rates, the German real estate market has so far proved to be comparatively robust overall - especially in comparison to the resulting valuations in other European markets such as the UK or the Netherlands.

At the same time, transaction volumes have declined significantly, as buyers and sellers have so far been unable to agree on market-clearing prices. This is likely to continue for some time. In Germany, valuations are generally carried out with a delay of six to nine months. With the scale of change currently being experienced, it is likely to be at least another nine months (as of March 2023). At the same time, many buyers are conspicuously cautious because, as we all know, no one wants to catch a falling knife.

The changing interest rate environment also means that institutional investors are again experiencing alternative opportunities in other asset markets, particularly in liquid markets where bonds have become an alternative again after many years. One of the consequences of this is that investment activity by institutional investors is currently declining, which is leading to a shortage of equity capital as well as to significant price declines, which is currently being felt painfully by project developers in particular.

Against this backdrop, all financiers have tightened their financing conditions and equity requirements. In the process, financing costs have risen significantly. The phrase "cash is king" is therefore once again instantaneous and consequently one should be able to observe a dominant "lenders market" again for the foreseeable future.

2022 may have been a volatile year for real estate markets as funding gaps widened and refinancing options began to dwindle at the same time.

How has economic uncertainty - inflation, rising interest rates, uncertainty about property values - affected the German real estate lending market? Debt funds are currently experiencing a significantly high number of financing requests for development projects that in the past would have been mainly financed by banks, but are now being underwritten by alternative lenders. Due to internal ratings and regulatory requirements for underlying equity, banks as regular senior lenders have to reduce their loan-to-value ratios. This resulting financing gap must be filled with a junior tranche due to this.

In general, alternative lending such as that through debt funds has grown very strongly in this country in recent years. Due to current regulations such as capital requirements, banks and credit institutions are forced to constantly realign themselves, which consequently opens the doors for alternative lenders. It is expected that the market share will continue to grow in favour of local debt funds (real estate loan funds).

If you look at the growth in Europe, you will see that the market penetration of alternative lenders for commercial real estate financing is around 10 percent. In the United Kingdom, it is already around 30 percent, and in the USA 40 percent. One can therefore expect a similar market penetration rate for Germany.

Borrowers therefore continue to experience private debt as a brilliant alternative in the wake of the financing gaps that have arisen. In general, banks, like credit institutions, regularly act procyclically and have noticeably reduced their lending in the wake of the economic shocks experienced in the past, while debt funds, on the other hand, can continue to offer higher loan-to-value ratios. Overall, this not infrequently results in greater flexibility in the respective financing provided with private debt capital.

Emerald Mezzanine decides on your financing request reliably and quickly. Our requirements and lending principles are reliable and determined. In doing so, we are happy to provide you with our expertise in advising, structuring and arranging the capital.

Our financing solutions can thus be understood as an essential financing option under dynamically changing framework conditions. The financing takes into account the individual real estate utilisation concept as well as the underlying corporate strategy and is both reliable and resilient. Our key lies in conceptual and economic understanding and is reflected in a balanced, appropriate and forward-looking allocation of opportunities and risks.

On this basis, Emerald Mezzanine evaluates your individual and viable financing solution.

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