As Michigan investment firms begins to roll out new forms of financing intended to give the commercial real estate market a much-needed boost, many developers might wonder if they are affordable. Several firms have announced plans to start up mezzanine funds, but this type of debt financing can carry interest rates of up to 30 percent. Although this funding is meant to serve as a quick method to inject money into a project early on, many feel that the loans are impractical and prohibitively expensive.

Developers still have access to other funding options. If a private investor and builder already have a good business relationship they will probably be able to work together successfully on other projects. Some industry professionals believe that commercial builders already have access to less expensive funding. For example, banks might be able to offer bridge loans at much lower interest rates than the rates usually attached to mezzanine debt.

The funds proposed by groups including Great Lakes Capital Fund and Michigan State Housing Development Authority could possibly introduce up to $220 million into Michigan’s commercial real estate development market. Although many developers might be skeptical, most agree that the new programs need to be used in the marketplace before reserving judgment on them. They cited other programs, such as the Community Revitalization Program from the Michigan Economic Development Corp., that took a while to get established but ended up being successful in the end.

Commercial real estate transactions can be complicated, especially in an economy that remains volatile. Developers may run into short-term financing problems and other issues. By exploring all their alternatives, they might be able to choose options that could provide optimum results.

Source: MiBiz, “Financing options, but at what cost?”, Elijah Brumback, October 27, 2013