Mezzanine Loans: Clearing Up The Confusion
If you are thinking about getting mezzanine financing, you should first be fully aware of what this type of loan is and then you should have knowledge of the financing structure involved in this loan. Here is everything you should know upfront about this type of financing, so you can make a knowledgeable decision.
What Exactly Is a Mezzanine Loan?
This financing is a general type of loan that basically refers to any type of financing, whether it is equity or debt that is issued by participants of private sectors that works to fill the gap found between sponsor equity and senior debt. It can fall into either being structured as debt or preferred equity. Now that you have a basic understanding about what this type of loan is, it is wise to know how it works and how it is structured.
How Does This Financing Work?
If you are considering mezzanine financing, you should know exactly how it works. The financiers will not typically receive any returns on investments until full compensation has been given to all senior debt holders. Investors in mezzanine loans look for returns from the senior debt lenders and the equity investors, depending on the structure of the loan.
When It Is Structured as Debt
Whenever the loan is structured as debt, there are forms of collateral that are typically involved. One example is a second deed of trust. This is a good form of collateral to have if you are in this situation because this gives the lender the best form of security. Most people who structure it as debt use assignment of partnership interest as their collateral. This basically means the investor has the ability to take the ownership interest of the one borrowing if anything goes wrong with the loan.
When It Is Structured as Equity
If the financing deal is structured as equity, it looks entirely different than when it is considered debt. If default occurs, the provider has the option to foreclose on any equity interests rather than on the actual property. The provider will then become the actual owner of the interests.
Mezzanine financing is a great option if you need proper financing in order to get a deal done. However, it is important to do research and make sure it is a good option for you because there are many risks that are involved in this type of loan. Just be sure to know all of the basics and know what you can expect from this financing before becoming involved in a deal.