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Mezzanine Loan Toolkit
Practical Law Toolkit w-017-9546 (Approx. 8 pages)
Mezzanine Loan Toolkit
by Practical Law Real Estate
| Maintained • USA (National/Federal) |
Resources to assist counsel to mezzanine borrowers and mezzanine lenders in understanding, drafting, negotiating, and closing mezzanine loan transactions. This Toolkit contains ancillary documents commonly used in closing a mezzanine loan transaction.
Mezzanine financing allows real property owners to borrow more than might otherwise be available from mortgage loan proceeds because of loan to value (LTV) requirements established by the mortgage lender. Mezzanine loans typically close contemporaneously with an underlying mortgage loan.
Mezzanine Versus Mortgage Loans
Mortgage loans are secured by a mortgage, deed of trust, or other form of security instrument recorded against real property and governed by the laws of the state where the encumbered real property is located. In contrast, mezzanine loans are secured by a pledge and security agreement in which the entity that owns and controls the mortgage borrower pledges its ownership interests in the mortgage borrower as collateral for the mezzanine loan. The Uniform Commercial Code (UCC) governs the transaction and the parties are free to select the governing state law.
Structure and Characteristics of Mezzanine Loans
The structure and characteristics of mezzanine loans make them structurally subordinate to the underlying mortgage loans, yet mezzanine lenders:
- Perform the same (if not more) due diligence on the property and the borrowing entities as mortgage lenders.
- Use many of the same forms of loan documents as mortgage loans (other than the pledge and other ancillary loan documents specific to mezzanine financing).
Uses for Mezzanine Loans
Purchasers and property owners seek mezzanine financing for many reasons, including:
- To acquire real property using mezzanine loan proceeds in place of the purchaser's own equity, particularly if the mortgage lender prohibits subordinate mortgage financing.
- To refinance a specific project requiring more loan proceeds than a mortgage loan provides. These projects include:
- major upgrades to old construction, including incorporating energy saving practices and technologies (see Practice Note, Owning and Leasing Green Real Estate);
- the conversion of a property to a new use, such as condominium conversions (see Practice Note, Condominium Declarations and Surveys); or
- re-branding a hotel from one flag to another (see Practice Note, Hospitality Law: Overview: Branded Franchise Arrangement).
The resources compiled in this Toolkit contain Practice Notes, Standard Documents, Standard Clauses, Charts, and State Q&A Tools with information and guidance for the legal practitioner working on mezzanine financing transactions.