How do you structure a mezzanine loan?
How Mezzanine Financing Works
- Mezzanine loans are subordinate to senior debt but have priority over both preferred and common stock.
- They carry higher yields than ordinary debt.
- They are often unsecured debts.
- There is no amortization of loan principal.
- It may be structured as part fixed and part variable interest.
What is the collateral for a mezzanine loan?
Mezzanine Financing generally utilizes a collateral assignment of the ownership interest in the Mortgage Borrower. Unfortunately, mezzanine loans are often underwritten at higher interest rates than traditional mortgage loans since a mezzanine lender will not be secured by any real property collateral.
Is mezzanine debt the same as convertible debt?
Mezzanine financing usually has equity participation in the form of warrants. A convertible structure allows the lender to convert all or a portion of the principal into equity of the borrower. Convertible debt tends to have lower interest payments but higher equity dilution than a structure with warrants.
Is mezzanine debt or equity?
Mezzanine debt bridges the gap between debt and equity financing and is one of the highest-risk forms of debt. It is senior to pure equity but subordinate to pure debt.
What is a mezzanine structure?
Mezzanine financing is the part of a company’s capital that exists between senior debt and common equity as either subordinated debt, preferred equity or a combination of the two. Part of the return on a mezzanine loan is fixed, which makes this type of security less dilutive than common equity.
Is a mezzanine loan a security?
A mezzanine loan is a type of subordinate loan that is indirectly, rather than directly, secured by real property.
What is mezzanine structure?
Is mezzanine preferred equity?
The primary difference between the two is that mezzanine debt is generally structured as a loan that is secured by a lien on the property while preferred equity, on the other hand, is an equity investment in the property-owning entity. …
What do you need to know about a mezzanine loan?
Key Takeaways 1 A mezzanine loan is a form of financing that blends debt and equity. 2 Lenders provide subordinated loans (less-senior than traditional loans), and they potentially receive equity interests as well. 3 Mezzanine loans typically have relatively high-interest rates and flexible repayment terms.
How does a mezzanine loan minimize equity dilution?
Minimize equity dilution: Instead of trading a substantial amount of equity for capital, borrowers can minimize their equity dilution while borrowing more than traditional banks want to lend.
How are subordinated debt and mezzanine loans different?
Part of the return on a mezzanine loan is fixed, which makes this type of security less dilutive than common equity. Subordinated debt is made up of a current interest coupon, payment in kind and warrants.
Can a mezzanine be structured as preferred equity?
It can be structured as preferred equity or as debt. In general, traditional mezzanine financiers are not entitled to receive returns on their investments until senior debt holders are fully compensated.
