These days, there is no shortage of angles from which to view the plight of commercial real estate. Foreclosures on mezzanine loans are another example.
The number of foreclosure notices filed by lenders on such loans has never been higher, the Wall Street Journal reported. Mezzanine debt not only carries a higher interest rate than senior loans, but it is also easier to foreclose, so distress usually shows up there first.
Before the rate hikes that began in March 2022, interest rates on mezzanine loans were typically between 10 and 12 percent, according to Mission Capital’s Alex Draganiuk. Today they are closer to 15 percent.
Lenders have issued 62 notices on mezzanine loans and similar high-risk loans this year through October, according to the Journal. That doubles the total compared to all of last year and is likely the highest annual total ever.
A definitive total is not known because Mezz loans do not appear in public records. For its analysis, the Journal counted references to foreclosures under uniform commercial laws in national and regional publications.
Mezz loans became more popular in the wake of the financial crisis, as large banks became more conservative and smaller banks moved deeper into the commercial real estate market.
Lenders can foreclose more quickly on mezzanine loans than on traditional loans because the former are not technically mortgages: they are secured by the company that owns the property, rather than the property itself. Since they are senior to Loans are secondary and therefore riskier, they achieve higher returns.
Foreclosures on mezzanine loans in the office sector are occurring faster than ever before. In a high-profile example a few months ago, SL Green took over Ben Ashkenazy’s share of 625 Madison Avenue in Manhattan after he acquired the share at a UCC auction. The lenders had filed for foreclosure on a $195 million mezzanine loan two months earlier.
Last month, Arden Group won the foreclosure auction for Sharif El-Gamal’s Margaritaville Hotel in Times Square. Arden had provided a $57 million loan secured by title to the property and began foreclosure after El-Gamal’s company defaulted earlier this year.
— Holden Walter Warner