Mezzanine Loan

Think of these as a form of second mortgage where the collateral is not the property, but the ownership interests in the entity that owns the property. Mezzanine loans are different from mortgages in that the debt is secured not by a mortgage on the property, but rather by a security agreement against the owner’s stock in the company that owns the property. If the borrower doesn’t make his payments, the mezzanine lender will simply foreclose on the stock of the corporation or the membership interests of the LLC that owns the property. Mezzanine loans are usually used to finance that portion of an acquisition that exceeds 80% of the loan to value ratio. So if a borrower is borrowing 80% pursuant to a traditional first mortgage loan, the borrower may finance an additional 5%-20% of its purchase with a mezzanine loan. They are also used by borrowers who want to pull money from their property and have sufficient equity in the property to do so. Typically mezzanine loans have higher interest rates, no prepayment penalties, one to three year terms. Mezzanine loans are time consuming to underwrite as lenders need to examine property documents and entity documents carefully, so they frequently have a minimum loan requirement of $2,000,000.

Through the use of techniques like mezzanine financing and land banks, developers of large residential real estate projects have been able to borrow and still keep debt off their balance sheets. Now that investors are eyeing off-balance sheet debt with a greater level of suspicion, will these tactics continue to rise?

Katharine Noble
Jones, Waldo, Holbrook & McDoonough, P.C.

Jeanne Calderon