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Mezzanine Loans

Mezzanine loans are loans that are often used by used by
developers to secure additional or supplementary financing for a development
project. This would be an additional loan that is over and above the agreed
loan that has been agreed to fund the project. So for example if a bank has
agreed to offer 70% of a development project, a developer make seek a
mezzanine loan for an additional 20% which would reduce his equity
contribution. These kinds of loans may be secured against the stock of the
development company or against the property themselves. If the loan is
secured against the stock of the company it allows for a more rapid seizure
of the underlying collateral in the event of foreclosure or default. Stock
which is a personal asset of the borrower can be seized in a legal process
taking as little as a few months while the foreclosure process can take as
long as a year.
The lenders will often want a higher interest rate to
compensate them for taking part of the risk that would normally be covered
buy the equity capital. The compensation may be in the form of a higher
interest rate or or it could include a share of profits of the development.
This type of loan is called mezzanine finance because it is an intermediate
level between debt and equity.


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