What is Mezzanine Financing?

What is Mezzanine Financing?

In most lending situations, there is simply a borrower and a lender, but in some situations a mid-level lender is included to help fortify the financial power of the agreement and offer more flexibility. This secondary financing level is known as mezzanine finance – just as it is in building it provides another level on the way up to the total.

It can be complicated, but in recent years it’s become easier to navigate. That said, the structure of mezzanine financing loans can be complex as they are designed to severely limit the ability of a borrower to declare bankruptcy, or default on a loan. In many cases, a special entity holding company will be established to ensure that the mezzanine provider’s interests in the underlying property is 100% guaranteed. To that end, the holding company is mechanized with numerous covenants and stipulations that control how all parties, especially the borrower, behave.

These agreements include what is known as an intercreditor agreement. This agreement is used to stipulate methods of communication between the two lenders and layout a procedure should the borrower default on the loan. Sometimes, conduit lenders will not agree to signing an intercreditor agreement with a mezzanine provider, but other times they will understand the ways in which mezzanine financing can strengthen the buying power of the borrower and the return on investment for all. In such cases, both creditors must come to terms that will be included in the primary mechanism of their agreement.

Most often intercreditor agreements allow for the mezzanine provider to be immediately informed in the event that the borrower defaults on the loan and given first prerogative at remedying the default. In such cases, the mezzanine lender will take over the property, rather than the mortgage lender foreclosing on the property for complete seizure. In some cases, the mezzanine lender will be allowed to foreclose on the property, but this stipulation is rarely accepted by the mortgage lender as it can lead to lack of confidence from both current renters and those who might be interested in renting in the future.

If you’re hoping to use mezzanine financing to strengthen your purchasing power and cash flow, you should learn as much as you can about the structure as it is subject to a wide variety of rules and regulations. Even with the added concerns of specific contract stipulations and increased participants, such financing plays a consistent role in the successful funding of numerous companies. Those who are must successful at applying this financing method will be those who are aware of both their legal protections and obligations within the agreement.

Mezzanine financing isn’t for the faint of heart and it’s not something you should consider without first consulting your professional advisors; including an attorney, an accountant and your broker.

If you have any questions about mezzanine financing, call us today. 516.268.0350