Mezzanine Loans are like a second mortgage and are secured by the stock of the company that owns the property and the property itself is not real estate. If the company does not succeed in making the payments, mezzanine lenders can foreclose on a stock in a few weeks. This is in contrast to the eighteen months it takes to foreclose a mortgage in many states. If you have a business that owns a property, you have power over the property.

A Mezzanine Loan reduces the dilution association with equity capital. It is issued as a loan with an extra revenue dependent fee. Mezzanine Loans are huge in amount. It is common to acquire mezzanine loans for as much as a million pounds.

The advantage mezzanine lenders have is that they can claim borrower’s stock in case of default or non payment. Stocks are the borrower’s property and can be seized by a legal proceeding that usually only takes a few months. This is in contrast to the amount of time a proceeding takes when it comes to property seizure. Property seizure proceedings can take over a year.

Use of Mezzanine Loans

A Mezzanine Loan is a kind of bridge loan that provides funding to buy property and equipment before a borrower owned property has been sold. This kind of funding is very difficult to get a hold of and arrange due to the fact that the borrower, generally without exception, will be over extending his commitments for a short period that the Mezzanine loan is for.

Mezzanine loans can be used by real estate developers as a source of supplementary funding for development projects. As in other mezzanine loans, those obtained by developers for real estate projects are collateralized by the company’s stock.

Mezzanine Lenders Opportunities

When evaluating mezzanine loan opportunities, mezzanine lenders look for:

• Well situated projects in strong markets
• Significant cash equity input by the borrower
• Strong profit margins
• Experienced developers
• Loans in the one to five million pounds range
• Yearly returns of just about 30%
• Conditions of 6 to 30 months
• Defined exit policy

Mezzanine lenders also look for a minimum internal rate of return that comes from four factors. These factors include arrangement fees, cash interest, payment in kind (PIK), and warrants. Arrangement fees are paid upfront. Cash interest is the same as interest and functions the same way also. Payment in kind (PIK) increases the underlying compound interest or principal by accruing periodically. Payment in kind (PIK) is in addition to cash interest.

Risk Factors

Mezzanine Loans are naturally risky. If the property does not make profit as expected, there is a real possibility of defaulting. The losses can be great. Mezzanine lenders have had to estimate this risk intuitively because it can’t be measured by normal underwriting techniques.

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