What is a mezzanine loan in real estate and how does it work?
A mezzanine loan is a hybrid financing instrument that sits between senior debt and equity in a property's capital structure, offering higher returns to lenders in exchange for greater risk and typically subordinate repayment priority.
How Mezzanine Loans Work
- Provides additional capital beyond what senior debt covers
- Repayment is subordinate to senior debt but senior to equity holders
- Often includes higher interest rates or equity conversion options as compensation for risk
Why Developers Use Mezzanine Financing
- Reduces the amount of equity capital required for a project
- Bridges the funding gap between senior debt and total project cost
Risk Considerations
- Lenders face higher risk due to subordinate repayment priority
In summary, mezzanine loans provide flexible, subordinate financing that bridges the gap between senior debt and equity in real estate deals. This financing type offers higher returns to lenders willing to accept increased risk.
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