What is a Mezzanine Loan?

Malcolm Tatum

A mezzanine loan is a type of debt that is often acquired as the means of providing the financing for larger building projects like office buildings, malls, or even multi-unit apartment complexes. Typically, a loan of this type is considered subordinated debt, in that other debt obligations of the borrower may have precedence in the event that some sort of financial reversal should occur. At the same time, a mezzanine loan is typically a secured debt that utilizes collateral such as stock or bonds to provide a measure of security for the lender.

Businessman with a briefcase
Businessman with a briefcase

In some ways, a mezzanine loan is much like a second mortgage. This is because the other debts of the borrower must usually be addressed before any claims by the lender of the loan will be considered. The difference is the way that this type of loan is equipped with security or collateral. With a second mortgage, the real estate itself serves as the security. By contrast, a mezzanine loan is normally secured with stocks or other investments owned by the borrower instead of the building and real estate that is currently under development.

In most nations around the world, a mezzanine loan is only written for a significant amount of money. While it is sometimes possible to obtain this type of loan in an amount as small as $1 million US dollars (USD), lenders who provide this type of financial service tend to focus on deals that involve lending $10 million USD or more. This means that potential borrowers must already have significant financial holdings in order to secure loans of this type.

Since a mezzanine loan is normally secured using assets that can be readily converted into cash, there are sometimes exceptions made in the event of a default. For example, many jurisdictions require a waiting period of up to 18 months before lenders can foreclose on properties that are held as collateral once the owner ceases to make loan payments. With a mezzanine loan, it may take no more than a few weeks for the lender to secure the right to seize control of the stocks or other assets that were pledged as collateral. This is because stocks and similar holdings are considered personal property, meaning the jurisdictional laws and regulations regarding the seizure of real estate holdings may or may not apply. Since these regulations do vary from one country to the next, it is important for both parties to understand their respective rights and responsibilities under current laws before choosing to enter this type of loan arrangement.

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