Mezzanine loans are debts that represent a claim on a company’s properties and can be structured either as debt or preferred stock. Higher cost of capital involved with mezzanine loans makes it an expensive option. Mezzanine financing is less likely to be paid back completely in the event of default; after all important obligations have been satisfied. These are private placements and are generally used by smaller companies.
Mezzanine loans are becoming a common alternative to conventional financing. It is so because a mezzanine loan is not secured by a deed on the property but by the stock of the company owning the property. If a mezzanine loan is in default, the lender takes majority ownership on the property. This can be advanced to the sale of the property as well. Even after the property is sold, the superior lien must be repaid but the lender has more flexibility in negative circumstances.
Mezzanine loans can be of many types like short term, long term, floating rate, fixed rate, and standing or amortized. Generally they are short term and floating rate loan transactions. It is similar to a second mortgage and is a form of junior financing with no claim on the property. Mezzanine loans pose some complications to the origination process.
Mezzanine loans can be provided by a bank or other channels financing for the property, with a term of 3 years and the lender gets a combination of front and back end fees. While a hard money lender offers a mezzanine loan with a similar term but with higher interest rates and fees. Mezzanine loans carry high interest rates and therefore should be avoided as a financing operation but they can be an important part of financial transactions.
