Mezzanine financing is often used in commercial real estate crowdfunding and social lending services. In property crowdfunding platform, a large portion of projects involve mezzanine loans – which we will now explain.
A mezzanine loan is a type of subordinate real estate financing, aimed at filling the gap between equity and debt.
Mezzanine loans are often used to finance leveraged buyouts, recapitalize a balance sheet, or fund internal growth strategies.
Mezzanine loans have become a common alternative to conventional subordinate financing where the terms of a first position loan prohibit junior loans.
Mezzanine funding can often result in the full funding of the equity required to complete the project, the costs of the project and any ongoing charges payable during construction.
Mezzanine financing is an unsecured form of debt, representing a claim on company assets ranked only above common shares.
It is considered to be of higher risk than more traditional forms of investment due to its unsecured ranking; however, it provides a higher investment return than secured or more senior lending.
Mezzanine loans allow for the capital injection needed without having to give up a lot of equity ownership.On the other hand, mezzanine financing takes on some disadvantages.
These include that mezzanine financing is not collateralized and that the lender has to takes on high risk.
Therefore, mezzanine financing is generally conducted by unconventional lending institutions versus standard lending institutions and interest rates and terms can be much higher than traditional debt financing.
To summarise, a mezzanine financing is a supplementary role for a more traditional senior loan. The risk associated with a Mezzanine loan is higher, but if you secured after performing a review of the loan and the investment opportunity, it can be a highly worthwhile investment.