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Equity financing and mezzanine financing can both be used in commercial real estate (CRE) transactions to raise capital.
Equity financing in CRE involves selling ownership shares in a property or a real estate project to investors in exchange for capital. These investors become part-owners of the property and share in any profits or losses that the property generates. Equity financing is commonly used in larger CRE transactions, such as the acquisition of a multi-unit residential property or the development of a new commercial building. Equity financing may also involve real estate crowdfunding platforms, which allow individual investors to pool their resources and invest in a project.
Mezzanine financing in CRE typically involves issuing debt that can later be converted into equity shares in the property or project. This type of financing is often used to bridge the gap between the equity financing that has already been raised and the total amount of capital needed to complete the project. Mezzanine financing is considered riskier than traditional debt financing, but less risky than equity financing, as it is secured by the property or project assets. Mezzanine financing is typically more expensive than traditional debt financing, but less expensive than equity financing.
Both equity financing and mezzanine financing can be useful tools for CRE investors and developers, as they can provide access to the capital needed to complete a project. However, it’s important to carefully consider the terms and conditions of each type of financing before deciding which one to pursue. Investors should also conduct thorough due diligence on the property or project before investing any capital, to ensure that the investment aligns with their financial goals and risk tolerance.