What Are Mezzanine Loans

What Are Mezzanine Loans?
An increasingly popular loan vehicle for commercial property,​ the​ mezzanine loan is​ similar to​ a​ second mortgage with a​ major variation .​
Rather than being secured by the​ actual real estate property,​ mezzanine loans are secured by the​ stock that is​ held by the​ company that owns the​ real estate .​
The real estate itself has already been used to​ secure the​ first,​ or​ primary loan .​
If the​ company fails to​ make timely payments on​ their mezzanine loan,​ the​ lender can foreclose on​ the​ property,​ seizing the​ stock .​
If the​ lender has control of​ the​ stock,​ the​ lender has control of​ the​ company and of​ the​ property or​ real estate .​
In fact,​ foreclosing on​ a​ loan that is​ secured by stock is​ much easier than foreclosing on​ a​ loan that is​ secured by real estate property.
If the​ loan holder defaults on​ the​ mezzanine loan,​ the​ lender can take over the​ stock of​ the​ company .​
This means that the​ lender can sell the​ property although it​ would still have to​ pay off or​ satisfy the​ initial mortgage .​
This strategy provides a​ streamlined foreclosure that takes much less time than the​ standard foreclosure on​ a​ mortgage.
Why would someone need to​ get a​ mezzanine loan rather than a​ conventional second mortgage? in​ many cases,​ the​ terms of​ the​ first loan preclude subsequent liens or​ second mortgages on​ the​ property .​
Hence,​ the​ mezzanine loan comes into play since it​ does not involve the​ actual real estate holding .​
It allows the​ borrower to​ have access to​ additional funds that would not be available otherwise.
Typically,​ a​ mezzanine loan is​ one that is​ acquired for a​ large project such as​ an​ office tower,​ large shopping center,​ shopping mall,​ large hotel,​ apartment complex,​ or​ industrial park .​
Mezzanine loans are large loans that cover millions of​ dollars of​ debt .​
In fact,​ mezzanine lenders are often quite specialized in​ the​ specific type of​ loans that they offer .​
Therefore,​ it​ might be necessary to​ search for a​ lender specializing in​ loans for the​ specific venture that you​ are in.
The first mortgage always takes precedence and the​ mezzanine loan always takes second place .​
For the​ borrower,​ one of​ the​ advantages is​ the​ ability to​ secure additional funds without the​ use of​ the​ property as​ security .​
The borrower can meet financial goals with the​ additional dollars provided by mezzanine loans .​
This would not be possible with conventional loans due to​ the​ terms arranged in​ the​ first mortgage .​
One of​ the​ advantages for the​ lender is​ the​ ability to​ foreclose at​ a​ quicker pace should the​ need arise .​
The mezzanine loan is​ a​ form of​ junior financing that has no claim whatsoever on​ the​ underlying real estate or​ property .​
The company or​ partners in​ the​ project pledge their interest holdings or​ stock as​ security .​
The interest of​ all holders must typically be pledged to​ the​ lender of​ the​ mezzanine loan .​
This practice guarantees that the​ lender will acquire full control of​ the​ stock or​ interest in​ the​ project should the​ loan default .​
Partial control could inhibit the​ ability to​ sell the​ property in​ order to​ realize the​ repayment of​ the​ loan.
Mezzanine loans can be short term,​ long term,​ fixed rate,​ floating rate,​ amortized,​ or​ standing .​
In most cases,​ they are short term,​ interest-only,​ and floating rate loan transactions .​
Additionally,​ this type of​ loan is​ generally used to​ borrow millions of​ dollars.

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