Most people in the greater Los Angeles area might think that real estate financing is simply another way of saying a person who wants to buy commercial property will need to visit a bank or lender and get a loan secured by a mortgage or other collateral.
After all, most people do not have enough cash on hand to buy commercial property or investment real estate outright, and only a few people would be able to take out a loan from a family member.
Would-be investors in commercial property do have the ability to get creative when it comes to paying for their business or for an investment property.
Alternative financing offers investors options other than traditional loans
For example, what is called a mezzanine loan may be a good option for certain projects.
Mezzanine loans are complicated, but basically, they allow the lender to claim an ownership interest in the business if the business does not pay back the loan on time.
Another benefit to the mezzanine loan is that the lender gets the benefit of higher rates of return on its loan. On the other hand, the borrower can obtain the loan without having to put up a lot of collateral.
Mezzanine loans are more common when growing businesses are planning to expand than when a business is just getting off the ground.
Other examples of nontraditional financing include signing a purchase agreement for business property that allows the buyer to pay the seller over time. For larger projects, an investor may want to consider a preferred equity arrangement.
Alternative financing may be very advantageous to commercial investors. However, these arrangements carry with them risks and drawbacks, and they also require attention to legal details. A person should consider the legal consequences of alternative financing carefully.