Shopping Basket
Your Basket is Empty
Quantity:
Subtotal
Taxes
Delivery
Total
There was an error with PayPalClick here to try again
CelebrateThank you for your business!You should receive an order confirmation from Paypal shortly.Exit Shopping Basket

Naqa Capital Management

Capital Formation and Capital Placement

My Blog

Blog

Mezzanine Debt Explained in Plain Egnlish

Posted on 9 November, 2015 at 1:01

Mezzanine financing is a sometimes confusing part of the capital structure in a real estate transaction. Part of the reason for this is that the term mezzanine is really a catch-all for an entire category of non-senior mortgage debt, non-common equity instruments that can fill a capitalization gap between them.
Mezzanine (“middle”) financing can take the form of debt or equity, more specifically:
  • Junior debt, such as a second mortgage
  • Preferred equity
  • Convertible debt
  • Participating debt
Senior mortgage debt is legally secured, or collateralized, by the physical property and the associated cash flows. A lien is placed on the property and recorded with the government to certify this legal relationship.
In all cases, the mezzanine instrument is subordinate to the senior debt, and in virtually all cases, the mezzanine instrument is not secured by the property, but rather by the equity in the entity that owns the equity in the property. As such, the mezzanine position is a riskier one to be in, and for this reason, the cost of mezzanine capital is higher than that of senior mortgage debt.
Assuming the mezzanine takes the form of junior debt, it would be modeled as follows:
  • for developments, the mezzanine will fund before the senior construction loan, and it will be repaid only after the senior loan is repaid in full. Your sources of funds formulas will need to reflect this priority of funding and lack of priority of return of principal.
  • for acquisitions, assuming all loans fund simultaneously at closing, there is nothing to do with respect to priority, but the repayment of the mezzanine loan needs to be on a residual basis to the repayment of the senior loan.
If the mezzanine financing takes the form of preferred equity, the funding will depend on the joint venture operating agreement between the mezzanine investor and the property equity sponsor. The preferred shares will give the holders of those shares some set of specified rights above that of the common equity, but again, it will still be subordinate to the senior debt. An example is that the preferred equity will participate in a priority preferred return whereas the common equity will not.
Convertible debt provides the debt with the option to convert into common equity at specific terms, and participating debt will receive interest payments and also participate in income above a specified level.  

Check out this Bruce's blog post for things to consider related to taking on mezzanine debt and the audio interview for details on inter-creditor agreements between mezz and senior lenders.
 
###
Based in Arlington, VA, REFM was founded by Bruce Kirsch in 2009. Mr. Kirsch is a recognized expert in and top instructor of Microsoft Excel-based financial modeling for real estate transactions. Through REFM, Kirsch has trained both new and experienced real estate professionals in financial modeling from a wide variety of real estate businesses, organizations and institutions, including private equity, development, brokerage, trade groups and government.  To read more articles by Bruce Kirsch go to: http://www.getrefm.com/blog/ or contact Bruce at [email protected]

Categories: Help Articles

Post a Comment

Oops!

Oops, you forgot something.

Oops!

The words you entered did not match the given text. Please try again.

584 Comments

Reply Sure Stock Cash Plus Tips
11:03 on 23 February, 2016 
Your blog left me warmhearted. Matter was expressed beautifully. I am thankful to you on behalf of all victims who can not read this blog.
Reply Epic Research
6:32 on 7 April, 2016 
I really appreciate with Your website, I have bookmarked it to favorite. I hope that You will keep up with attractive content, your post was very informative.
Reply australianessays
10:33 on 27 December, 2017 
Mezzanine debt explained in plain egnlish the real estate transaction and more take the form of debt or equity. Great job, this ylishalemcapital blog always giving us about mezzanine instrument is subordinate debt.
Reply ghattam
10:43 on 25 January, 2018 
I can not wait to visit this blog for the better and wonderful college and essay services for the better topics as well. This essayservices reviews blog has been sharing about reviews and making the essay making tips as well.
Reply write my paper for me
8:34 on 2 July, 2018 
Find out how our essay writing services can provide you with the kind of assistance and guidance you need with your university essays by referring to the information below.
Reply https://showboxsave.com/
4:46 on 20 July, 2018 
It is the place to watch the latest episodes of serial and movies and it is really very nice and amazing site to do entertainment in free time.
Reply buy essays online
22:46 on 18 October, 2018 
This explanation is awesome! I am so glad I've found this post here!
Reply Godaddy $1 web hosting
11:12 on 8 November, 2018 
I really love to read this kind of knowledgeable post blog. thanks for publishing.
Reply Lechonaco
1:39 on 19 November, 2018 
[email protected]
game barbie and baby
Reply Carmen Coward
12:06 on 29 November, 2018 
Amazing Information. I really Like it. google camera Flashlight apk wifi unlocker
Reply water damage restoration houston TX
16:44 on 20 December, 2018 
Excellent article to read. Very interesting to read. I really love to read such a nice article. Thanks! keep rocking.
Reply fast water damage restoration San Diego
16:14 on 24 December, 2018 
Sure Stock Cash Plus Tips says...
Your blog left me warmhearted. Matter was expressed beautifully. I am thankful to you on behalf of all victims who can not read this blog.

Well written stuff with your own words you have just share with everyone, I merely hit upon this web site and desired to enunciate. I like this post that amazing and interesting.
Reply 879789
7:23 on 4 January, 2019 
978
Reply essay review service
8:06 on 7 January, 2019 
I have never fully understood mezzanine debt before. Now, because of your plain explanation, I am now able to comprehend what the debt really means. I have a task at school regarding the research about the said debt. Now, I would be able to confidently present my report and will help me with passing that subject. I am indeed in a huge debt to you because of your help with this confusing mezzanine debt topic. I am looking forward to make it up to you Lisha someday.
Reply 2 player basketball games
10:25 on 10 January, 2019 
It is a great website.. The Design looks very good..
Reply Jane
11:10 on 1 April, 2019 
Thanks because of this! I've been searching all more than the web for that details.
lightweight tarp
Reply Damy
12:03 on 1 April, 2019 
Thank you for all your efforts that you have put in this. Very interesting information I like this site very much so much superb information
garage shelving systems
Reply Shawn
12:25 on 1 April, 2019 
Very nice and interesting history on Your blog. Thank you very much
rubber grass mats
Reply beckham
13:06 on 1 April, 2019 
Very good article here and you have done a very good work here taking out your time to explain in detail. Thank you very much for it
Rubber Gym Flooring
Reply Dwayne
13:06 on 1 April, 2019 
Very good post about Mezzanine financing. I really happy to read this post and improve my knowledge about Mezzanine financing.Thanks and carry on it.To get london brick click here http://londonbricksuk.co.uk/
0