Mezzanine Financing

Summary

A mezzanine loan is a type of subordinate loan that is indirectly, rather than directly, secured by real property. Unlike a mortgage loan, which is secured by real property, a mezzanine loan is secured by a pledge of equity interests in an entity that owns real property and is governed by the Uniform Commercial Code (UCC). While the performance of both the mortgage loan and the mezzanine loan depends on the income from the underlying real property, the nature of the mezzanine loan security creates additional risks to both the mezzanine lender and the mezzanine borrower that should be understood by counsel to either. This practice note discusses the structure of a mezzanine loan on a stable, income-producing property. It addresses key due diligence issues unique to mezzanine lending and gives an overview of necessary loan documents and third-party agreements, including the intercreditor agreement, which governs the relationship between the mortgage lender and the mezzanine lender.