Mezzanine Loans

The capital stack has evolved over the years with the primary change being the complexity, structure and pricing of the tranches. When discussing Mezzanine debt its important to understand that pricing will be affected not only by the high-point of leverage but also how low in the capital stack (the attachment point) it sits. Additionally, the use and structure of mezzanine debt will also affect pricing. Though usually non-recourse (no principal repayment guarantee) In rare cases where a strong balance sheet entity can reduce its cost by providing the guarantee as a credit enhancement.

Unlike Senior Debt which is directly secured by the property, via a mortgage, a Mezzanine Loan is only indirectly secured by the underlying asset. The collateral for a Mezzanine loan is a pledge of the equity/partnership interests of the borrowing entity. That pledge is evidenced by a Uniform Commercial Code-1 (UCC-1) filing. For asset specific capitalization the borrowing entity is usually the property-owning entity.

When arranging Mezzanine financing it is good business practice to confirm that the potential provider has previously negotiated an intercreditor agreement with the anticipated senior debt provider. This agreement lays out the lien positions, rights and remedies of the creditor parties and as such when newly negotiated can increase closing times and costs for the borrower (who almost always pays closing costs).