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Thursday, September 11, 2008

Daily Observations - Mezzanine Financing

One of my M-Team members asked me to spend a bit of time discussing mezzanine financing. As I am not an expert in this area of fiance I have gleaned information from other sources. But the gist of the mez piece is that mez financing was originally utilized in the area of corporate finance and its only recently that the mez world as opened to the real estate world. Mez financing is now found in development deals, un-stabilized properties and even stabilized properties.

The purpose of the mez piece is to supply a missing piece of equity in the transaction. For example very simply if a bank needs 25% down, and the borrower only has 15% down the mez piece can account for the remaining 10%. But here's the catch, what do you lose if the deal goes bust, the entire project, because the mez piece is not only a debt component its also an equity component which is much easier to foreclose on due to the personal nature of the equity and not the realty nature.

As defined in Wikipedia, for whatever that's worth, "Mezzanine capital, in finance, refers to a subordinated debt or preferred equity instrument that represents a claim on a company's assets which is senior only to that of a company's common shareholders. Mezzanine financing can be structured either as debt (typically an unsecured and subordinated note) or preferred stock.

In real estate finance, mezzanine loans are often used by developers to secure supplementary financing for development projects (typically in cases where the primary mortgage or construction loan equity requirements are larger than 10%). These sorts of mezzanine loans are often collateralized by the stock of the development company rather than the developed property itself (as would be the case with a traditional mortgage). This allows the lender to engage in a more rapid seizure of underlying collateral in the event of default and foreclosure.

Standard mortgage foreclosure proceedings can take more than a year, whereas stock is a personal asset of the borrower and can be seized through a legal process taking as little as a few months"

For more on mezzanine financing access the Internet, for more on investment properties view loanforbiz.com.

1 comment:

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