There’s no shortage of angles from which to view commercial real estate distress these days. Mezzanine loan foreclosures is yet another.
The number of foreclosure notices from lenders on such loans has never been higher, the Wall Street Journal reported. In addition to carrying higher interest rates than senior loans, mezzanine debt is easier to foreclose upon, so distress tends to show up there first.
Prior to the interest rate increases that began in March 2022, mezzanine loan rates typically ranged from 10 to 12 percent, according to Mission Capital’s Alex Draganiuk. Today, they are closer to 15 percent.
Lenders issued 62 notices on mezzanine loans and similar high-risk loans this year through October, according to the Journal. That doubles the total from all of last year and likely represents the highest yearly total ever.
A definitive total is unknown because mezz loans do not appear in public records. For its analysis, the Journal counted uniform commercial code foreclosure-sale notices in national and regional publications.
Mezz loans became more popular in the wake of the Financial Crisis when big banks became more conservative and smaller banks moved deeper into the commercial real estate market.
Lenders can foreclosure on mezzanine loans faster than traditional loans because the former aren’t technically mortgages: They are secured by the entity that owns the real estate, not by the real estate itself. As they are secondary to senior loans and therefore riskier, they generate higher yields.
Mezzanine loan foreclosures in the office sector are unfolding at a speedier clip than ever. In one high-profile example a few months ago, SL Green took over Ben Ashkenazy’s interest at 625 Madison Avenue in Manhattan after acquiring the stake at a UCC auction. Lenders had moved to foreclose 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 the property’s ownership and started trying to foreclose after El-Gamal’s entity defaulted earlier in the year.
— Holden Walter-Warner