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| Mezzanine loans and preferred equity investments are used to achieve very high leverage on large commercial projects. Normally conduits, banks, and life companies will not exceed 80% loan-to-value when making commercial mortgage loans. Mezzanine loans and preferred equity investments are stacked on top of big construction loans or a big permanent loan to achieve loan-to-cost ratios as high as 95% and loan-to-value ratio's as high as 90%. |
| A preferred equity investment sounds quite different than a mezzanine loan, but it accomplishes almost the exact same thing. The lender makes an investment of equity with a preferred return in the LLC that owns the big commercial project. If the management of the LLC fails to pay the preferred member the promised return, the old management is replaced and the common members of the LLC (the former owners) lose their voting rights, dividends, and right to the distribution of any profit. |
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