Mortgage Banking

To buy a commercial property you have to have deep pockets. For those coming up a little short (myself included) you have several options. You can either get a partner to put up some of the money, get a loan to cover what you’re lacking or get a combination of the two. The combination of equity and loan(s) in a deal is called the Capital Stack. Whenever I hear this term, I always think of pancakes. It might be because I’m a visual person or maybe it’s because I just really like breakfast. Regardless of the reason, I’m going to use the image of a stack of pancakes to help explain this concept. For this example, we’ll assume we’re trying to use as much “other peoples” money as we can.

Imagine a stack of ten pancakes on a plate. The entire stack represents the purchase price of a property, therefore each pancake will represent 10% of the price. The first seven or so pancakes (70% of the purchase price) represent a permanent loan. This is the long term loan from a bank, conduit, or life company and will have the lowest interest rate out of the stack. The next half to one full pancake (usually around 5% – 10% of the purchase price) is the mezzanine (or second) loan. Usually from a different lender this loan comes on top of the permanent loan and is usually for five or less years (but can match the length of the perm loan) and has a higher interest rate than a perm loan. The next pancake (from 5 to 15% of the purchase price) is the joint venture partner. This type of “pancake” will charge a higher interest than a perm or mezzanine loan, becomes part of the ownership entity and is concerned with having an exit from the investment (typically in five to ten years). The last pancake is the equity the buyer brings to the table. See below for a visual representation of the Capital Stack.

Not every deal will utilize the entire capital stack. Most don’t. But it is important to know the option is there. Ask an experienced mortgage banker what would work in your particular situation.